Wednesday, September 21, 2011

Ilargi: I'm not even sure if it's right to claim that it's unique to our societies, but it's certainly something like a token sign. We do a lot of stupid and useless things, but this one is right up there with the cream of the crop of them.

For days now, the entire financial world seems to be holding its breath waiting for Ben Bernanke to issue a statement on what his Federal Reserve aims to do next, a statement to be delivered today, Wednesday, around 2.15 PM EDT.

What makes this so remarkable is that it should be clear to anyone with a pulse and some control of any of their senses left, that Bernanke's upcoming speech is completely inconsequential for more than a very short and fleeting moment in time. The Fed can't save our economies or banks from the upcoming recession slash depression anymore than it can send a rocketship to Andromeda.

The Federal Reserve is impotent when it comes to saving the economy, even if it tries with all its might not to show it. It flaunts its fictional capacity and ability to come up with new and creative well-calculated measures to influence everything from A to Z like once upon a time the emperor flaunted his new clothes. And no matter how badly any and all of its previous measures have failed, the vast majority among us still praises the subtly elegant materials and their dream-provoking shine. We don't want reality, we want to believe.

Oh, but you say, the Fed did succeed at times: didn't QE1 saved the economy?! No, I say, it did nothing of the kind. One might argue that it saved the day, perhaps, but all it really accomplished was to make the crisis more opaque. And granted, that may well be what it was designed for. So in that light, yes, one can argue that the Fed has been highly successful.

But that is not what we are looking for in a central bank. What we are looking for is for it to, indeed, save the economy, in order that, in the case of the Federal Reserve, ordinary Americans can look forward to decent paychecks, and homes they can keep living in, and bright futures for their kids.

Well, neither QE1, nor for that matter any other of the Fed's measures of the past few years, have done anything at all to stop housing prices from plunging, to make sure people get hired again, or to make our children's futures look less bleak. And it has failed to accomplish all of this while spending on and lending to the global financial system some $10-$20 trillion in American "wealth", public funds.

It’s simply not true that with different policy decisions, the day could be saved. The choices lie elsewhere: are we going to use the people's money to "save the financial system", or will we use it to alleviate the misery of the people themselves? To date, the choice Washington, Brussels et al have opted for is abundantly clear: not one choice has been made based on what is best for the people. Instead, the people are told that it’s in their best interest if their money is used to prop up failed and bankrupt institutions. And so far, the people buy this baloney.

Everyone wants to believe that it's possible to be saved from hardship. Even if they are thrown step by step into hardship while being "rescued". It’s time we all understand that the interests of the financial world are diagonally opposed to our own interests. This might not have been true if a rescue were possible, but it's not.

It’s not even either/or: the financial system is profoundly broke, and governments and central banks cannot fork over enough leveraged credit to make it sound again. The world of finance will have to fess up to its losses, it must default and be restructured, many of its components must disappear never to be heard from again. And the last thing that should happen is for more public funds to be thrown down the banking drain. Alas, the last thing that should happen is the only thing that does.

Basically, we are told that "our" central bank exists for the greater good of society, if not to benefit mankind as a whole, and that its decisions are based on models so complicated, and based on the most thorough science known to the human brain, that it would be futile for any of us to try and understand its actions. We should leave that to the experts, who, oh lucky us, also happen to be solely concerned with our best interests, not their own.

Right now, the only time when one of the leading political and/or regulatory bodies in the world volunteers to give you a glimpse of reality, it's to extort ever and even more of your money. The IMF came out with a dire report this week, but only so it can argue for more stimulus (which simply means more money being transferred from the public to the private sector). The IMF represents the financial sector; it does unequivocally not represent you, no matter what claims it may make to the contrary.

It's nonsense to claim that what benefits the financial sector would automatically benefit you as well. The opposite is true. To understand and process that fact, however, you will first need to figure out that the entire financial sector is indeed bankrupt. It doesn't seem to be, perhaps, at first glance, but it's not all that hard to see it for what it is.

All you need to do is imagine where Wall Street banks, and the world's other main banks, would be today if not for the money they have already received from the public trough. They wouldn’t be anywhere is where they would be; they would no longer operate as going concerns. And then, even with all that money, they have lost 70-80-90% of their market values.

It's not all that difficult. As soon as you hear Bernanke utter the phrase "economic growth" without linking it directly to the phrase "default", you’ll know he's a fraud. Our economies may in all likelihood never return to growth, ever, but they certainly won't do so until the overhanging debt has been purged, starting with the toxic part of it. You should consider anything less from Ben an affront to your intelligence. Chances are, however, that you won't. Because all these political-media-industry voices will keep on telling you how important Bernanke and the Fed are.

The Fed sets interest rates, right? Wrong. It does nothing of the kind. All Bernanke can do is set a Fed funds rate, close his eyes, fold his hands and pray it’ll stick for more than 5 minutes. That's the extent of his control over interest rates. In reality, the markets set interest rates.

Obviously, the ECB would love to keep Italy's borrowing rates down, it would save it a huge headache. Problem is, it can't: the markets currently demand a much higher rate for Italian debt than the ECB, or Rome, like. What the IMF wants the ECB to do is buy huge piles of Italian debt, while in the process de facto crippling the free market system.

But until and unless Italian debt is purged, the ECB would have to buy all of it, including all the upcoming dozens of billions in rollovers, or Italy would need to go elsewhere anyway. The ECB may save the day, but that's all: it can't even save the week that day is in.

The Fed has a bunch if options this afternoon, say the media. It can Twist, i.e. sell short term Treasuries to buy long term ones, but that buck stops at about $300 billion and carries no surprises, is priced in. It can cut the interest rate it pays on excess reserves banks hold with it (IOER). Priced in as well, and by no means a big deal to begin with: banks are not going to start lending again all of a sudden because that rate falls from 0.25% to something even less.

The third option is a change of language, to the effect that Bernanke will say they'll keep interest rates at X% until unemployment is below Y%, as long as inflation remains below Z%. Well, that is moot, since, as we saw, the Fed doesn’t set interest rates. What is interesting in this regard is what language Ben will utter when a Greek default starts the EU downfall and the grand flight to safety into the USD and Treasuries. It'll demolish US exports, which will demolish jobs, which will drive down home prices, and so on and so forth. The dollar will be strong, but the majority of Americans won't have any.

Ben will, in that case too, still be naked and impotent, but don't count on him admitting it. And that's the real problem here, isn't it? Surely there must be some neuron in that bald scalp that realizes it's attached to nothing but a chubby flubby naked body. That neuron, then, will also realize that the body has no balls either.

Wouldn't it be something if Bernanke simply states the truth later today, and tells the nation there's nothing he can do to save it, but that even though he may be impotent, he sure as hell still can grow a pair, and he's decided to come clean? Nah, dream on, that would take a real man.

PS: No, it's true, Bernanke is of course not entirely without power. He has the power to take as much of your money as he pleases, to do with as he pleases. And he does so with reckless abandon. But that's not what he's going to talk about.

A Greek default and exit must be taken in the people's interests – not entrusting the process to the EU, IMF and banks

Greece is facing an economic and social disaster, the result of its so-called rescue by the "troika" of the EU, the International Monetary Fund and the European Central Bank. Greece must change course to avoid a grim future for its people: it must default on its debt and exit the eurozone.

Consider first the scale of the crisis. After contracting in 2009 and 2010, GDP fell by a further 7.3% in the second quarter of 2011. Unemployment is approaching 900,000 and is projected to exceed 1.2 million, in a population of 11 million. These are figures reminiscent of the Great Depression of the 1930s.

The causes clearly lie with the programme of the troika. In early 2010 Greece was effectively bankrupt. In its wisdom, the troika imposed policies of severe austerity and deregulation consistent with the neoliberal ideology of the EU. Quite predictably, demand collapsed and banking credit became scarce, with the result that the core of the Greek economy was crushed.

The social implications have been catastrophic. Entire communities have been devastated by unemployment, losing the means to live as well as the norms, customs and respect of regular work. Barter has appeared among the poor and the not so poor. Medical services in working-class areas are running low on basic provisions. Schools and transport are disintegrating. People are abandoning cities to return to agriculture, a sure sign of social retrogression.

As the recession deepened, the programme failed to meet even its own targets. The budget deficit for 2011 is on course for 10% of GDP, when the target was slightly above 7%. The debt-to-GDP ratio could reach 200% in 2013, up from 115% in 2009. But the troika has refused to acknowledge failure and in early September blackmailed Greece: take further austerity measures or there will be no more lending. The government has buckled, introducing the equivalent of a heavy poll tax on property. A further meeting with the troika was scheduled for today, following which there would be mass layoffs of civil servants, further wage and pension cuts, still higher indirect taxes, and so on.

These measures are also likely to fail: they will intensify the recession and be opposed politically. George Papandreou's government is isolated, and the ruling party has lost any ability to generate grassroots support. The official opposition, New Democracy, has been critical of troika policies, hoping to make electoral gains. The parties of the left have already called for open defiance and non-payment.

In practice Greece is on the brink of defaulting and abandoning the euro. This is the harsh reality, though none of the major parties is prepared to acknowledge it. The tragedy is that Greece now has a far weaker economy than in 2010. It is likely, therefore, that there will be major economic and social upheaval with unpredictable outcomes.

With the best interests of its people in mind, what should a government do? The first step would be to default, but without entrusting the process to bankers, the EU and the IMF, for we have evidence of what that would mean. Last July Greece agreed on an exchange of old for new debt that would reduce its debt to banks by 21%. Yet it also had to provide massive collateral guarantees to banks, with the result that its total debt might actually increase. Even so, many banks have not accepted this incredibly favourable deal, hoping instead for full repayment.

If default is to secure a deep cancellation of debt, it must be driven by Greece and it should be coercive as far as the banks are concerned. But it must also be democratic, based on an independent auditing of debt to ascertain how much might be illegitimate. Greece is not without advantages in this regard. Most public bonds are subject to domestic law that means terms of repayment can be altered through an act of parliament. Moreover, the "rescue" loans by the EU and the IMF may be declared illegitimate by an independent audit. The Greek people could thus regain a modicum of self-respect, savagely destroyed during the last couple of years.

The second step would be to exit the eurozone, but in a manner that would be in the long-term interests of working people, not big business or banks. Contrary to what is often asserted, Greece would not collapse if it quit the euro. After all, monetary unions have a limited shelf life, and Europe's is a particularly badly structured one. Exit is the most sensible way for Greece to restore competitiveness and start to recover. The alternative is to continue with austerity packages that do not work and will lead to long term decline.

A progressive government would take several decisive steps: switch to a new drachma quickly; nationalise the banks; and impose capital controls. There would need to be administrative measures to ensure supplies of oil, food and medicine, along with income and wealth redistribution to support the poorest. Recovery should start in a few months, spurred by devaluation that would allow industry to increase exports and recapture the domestic market. If progressive forces showed sufficient will, it would then be possible to transform the economy deeply, changing the balance of power in favour of working people.

Default and exit would cause international turmoil. Greek debt may not be large enough directly to threaten European banks, but world banking is in a fragile state. Greek action would disturb the secondary markets for sovereign bonds, potentially leading to a major crisis. But the EU authorities would have only themselves to blame, since their policies are in effect driving Greece out of the eurozone.

For anyone who thinks that crushing the Greeks with even more dent and even more austerity will somehow ‘save’ europe’s insolvent banks here from Reuters is why it won’t.

First here’s Europe’s bank exposure to Greece:

Remember this isn’t the fabled public debt wracked up by countless lazy, feckless lay-abouts and their ugly children all determinedly doing nothing and expecting to be given flat screen televisions and hospital care they don’t deserve. This is debt created by, agreed to, marketed by and because of which huge bonuses were awarded to, private bankers throughout Europe.

I think that shows quite clearly why French banks have been pulverized and the size of the crater on whose edge they teeter. But let’s imagine Germany ignores the rising tempest of public anger and throws its money into the hole. Now let’s look at what comes next, Italy.

In case you want to see more of the images,they come from a very good Reuters graphic of the total European debt debacle which you can see in its horrid entirety here, here and here. The first two are part of the same group but I’m giving you different entry points. Then third is a larger package. And this is a ZeroHedge article in case you want to see what people are saying over there.

I must admit to being delighted that the EU finance ministers have found unity on one point: dismissal of Tim Geithner as officious, ignorant and unaccountable. He is an example, right up there with George W. Bush, of the privileged American elite who "fail upwards" throughout a career.

Europe's nations may have an escalating debt crisis, but they have been addressing it sensibly and cautiously by trying to rein in further debt through reductions in government spending.

The perfect example from the meeting logistics: EU finance ministers shared a bus to the meeting, while Tim Geithner insisted on a private car.

Geithner seems to abhor austerity and sacrifice, preferring any strategy which keeps debt growing to fund the investment banking, security, prisons and war industries on which the American economy now depends for so much of its GDP. (2 percent of Americans are in prison, while 1 percent work for the Department of Defense.)

He encouraged a ten-fold increase in leverage of the EFSF to create a massive new debt overhang. Madness. The cure for a refinancing crisis is not more leverage to be later refinanced.

Europe has its problems, but one thing I know is that the default setting for Europe is cooperation where the default setting for America is conflict. If Tim Geithner's objective in coming to Poland was to stimulate consensus among European finance ministers, then he can go home happy. He succeeded. They are unified in finding him and his policies discredited. They will work together from that consensus to find a more workable solution for Europe than could ever be conceived in Washington, precisely because they will work together in recognition of mutuality of interest.

UPDATE: As this is being linked elsewhere, I'll add a suggestion about what I would advise the eurozone finance ministers. I would advise them to have every EU state with off balance sheet, hidden liabilities on derivatives - whether undertaken for window dressing to gain admission to the eurozone or any other purpose - to default on any further margin or resettlement payments. The Hammersmith and Fulham defaults of the late 1980s proved a wonderful discipline on the investment banks, schooling them in the limits of preying on local governments. It might be time for another lesson at the national level.

Each of the defaulted derivatives contracts could be referred to an EU committee to determine whether the contract had any legitimate rationale beyond disguising the financial condition or otherwise deceiving the public or other EU governments. If there was no legitimate rationale which served the public interest, then the contract would be declared unenforceable.

This wouldn't address decades of deficit spending, but it would provide a popular demonstration of resolve to shaft Wall Street rather than the taxpayer, at least in the first instance. The politicians should then have enough breathing room to reach a more resilient agreement on fiscal policy and funding going forward.

I appreciate that questioning the validity and enforceability of derivatives contracts might be "extra-legal" in the sense that it would be contrary to accepted legal norms. But since virtually every intervention and liquidity programme innovated by a central bank since 2007 has been without legal or statutory basis, despite the huge redistributions of national wealth, I hardly consider that a sticking point.

In a blunt rejoinder to congressional Republicans, President Barack Obama called for $1.5 trillion in new taxes Monday, part of a total 10-year deficit reduction package totaling more than $3 trillion. He vowed to veto any deficit reduction package that cuts benefits to Medicare recipients but does not raise new revenues. "We can't just cut our way out of this hole," the president said.

The president's proposal would predominantly hit upper income taxpayers but would also reduce spending in mandatory benefit programs, including Medicare and Medicaid, by $580 billion. It also counts savings of $1 trillion over 10 years from the withdrawal of troops from Iraq and Afghanistan.

The deficit reduction plan represents an economic bookend to the $447 billion in tax cuts and new public works spending that Obama has proposed as a short-term measure to stimulate the economy and create jobs. And it gives the president a voice in a process that will be dominated by a joint congressional committee charged with recommending deficit reductions of up to $1.5 trillion.

His plan served as a sharp counterpoint to Republican lawmakers, who have insisted that tax increases should play no part in taming the nation's escalating national debt. Obama's plan would end Bush-era tax cuts for top earners and would limit their deductions. "It's only right we ask everyone to pay their fair share," Obama said from the Rose Garden at the White House.

In issuing his threat to veto any Medicare benefits that aren't paired with tax increases on upper-income people, Obama said: "I will not support any plan that puts all the burden for closing our deficit on ordinary Americans." Responding to a complaint from Republicans about his proposed tax on the wealthy, Obama added: "This is not class warfare. It's math."

The Republican reaction was swift and derisive. "Veto threats, a massive tax hike, phantom savings, and punting on entitlement reform is not a recipe for economic or job growth--or even meaningful deficit reduction," Senate Republican leader Mitch McConnell said in a statement issued minutes after the president's announcement. "The good news is that the Joint Committee is taking this issue far more seriously than the White House."

Obama's proposal comes amid Democratic demands that Obama take a tougher stance against Republicans. And while the plan stands little chance of passing Congress, its populist pitch is one that the White House believes the public can support.

The core of the president's plan totals just over $2 trillion in deficit reduction over 10 years. It would let Bush-era tax cuts for upper income earners expire, limit deductions for wealthier filers and close loopholes and end some corporate tax breaks. It also would cut $580 billion from mandatory programs, including $248 billion from Medicare. It also targets subsidies to farmers and benefits programs for federal employees.

Officials cast Obama's plan as his vision for deficit reduction, and distinguished it from the negotiations he had with House Speaker John Boehner in July as Obama sought to avoid a government default.

As a result, Obama's proposal includes no changes in Social Security and no increase in the Medicare eligibility age, which the president had been willing to accept this summer. Administration officials also said that Obama's $1.5 trillion in new taxes is a goal that Congress could achieve through a broad overhaul of the tax code. They said the president's specific proposals represent one way to get to that goal under the existing tax code.

Coupled with about $1 trillion in cuts already approved by Congress and signed by the president, overall deficit reduction would total more than $4 trillion, a number many economists cite as a minimum threshold to bring the nation's debt under control.

Key features of Obama's plan:

$1.5 trillion in new revenue, which would include about $800 billion realized over 10 years from repealing the Bush-era tax rates for couples making more than $250,000. It also would place limits on deductions for wealthy filers and end certain corporate loopholes and subsidies for oil and gas companies.

$580 billion in cuts in mandatory benefit programs, including $248 billion in Medicare and $72 billion in Medicaid and other health programs. Other mandatory benefit programs include farm subsidies and federal employee benefits. Administration officials said 90 percent of the $248 billion in 10-year Medicare cuts would be squeezed from service providers. The plan does shift some additional costs to beneficiaries, but those changes would not start until 2017.

$430 billion in savings from lower interest payment on the national debt.

$1 trillion in savings from drawing down military forces from Iraq and Afghanistan.

Republicans have ridiculed the war savings as gimmicky, but House Republicans included them in their budget proposal this year and Boehner had agreed to count them as savings during debt ceiling negotiations with the president this summer.

Illustrating Obama's populist pitch on tax revenue, he suggested that Congress establish a minimum tax on taxpayers making $1 million or more in income. The measure -- the White House calls it the "Buffett Rule" for billionaire investor Warren Buffett -- is designed to prevent millionaires from taking advantage of lower tax rates on investment earnings than what middle-income taxpayers pay on their wages.

That minimum rate, however, is not included in the White House revenue projections. Officials said it was a suggestion for Congress if it were to undertake an overhaul of the tax code. At issue is the difference between a taxpayer's tax bracket and the effective tax rate that taxpayer pays. Millionaires face a 35 percent tax bracket, while middle income filers fall in the 15 or 25 percent bracket.

But investment income is taxed at 15 percent and Buffett has complained that he and other wealthy people have been "coddled long enough" and shouldn't be paying a smaller share of their income in federal taxes than middle-class taxpayers.

After the release last week of the Federal Reserve's quarterly Flow of Funds report, I saw a number of references to the data series for household and nonprofit organization net worth. A quick glance at the complete quarterly data series in linear chart suggests a bubble in net worth that peaked in Q2 2007 with a trough in Q1 2009, the same quarter that the markets bottomed. The latest Fed balance sheet shows a total net worth that is 18.1% above the 2009 trough but still 11.3% below the 2007 peak. The disappointing news in the Q2 balance sheet is that total net worth has slipped 0.3% from Q1 of this year.

But there are problems with this analysis. Over the six decades of this data series, total net worth has grown by 5000%. A linear vertical scale on the chart above is misleading in its failure to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002.

Here is the same chart, courtesy of the FRED (Federal Reserve Economic Data) repository), this time with a log vertical scale. The difference is rather astonishing.

But there is another problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew 5000%, the value of the 1951 dollar shrank to about 11 cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index.

We'll take another look at the nominal and real numbers after the release of the Q3 Flow of Funds data on December 8th.

Note: I've referred to this data series as "household" net worth. But, as I show in the chart titles, it also includes the net worth of nonprofit organizations. The ratio of two isn't clearly defined in the Fed data, and it obviously varies by asset and liability component. I've seen estimates that the nonprofit component is around six percent of the total net worth.

One easy (and rather illuminating) point of comparison in the Flow of Funds data is the relative share of real estate at market value (B.100 lines 3,4, and 5). In the latest report, nonprofit organizations hold 10.9% of combined household and nonprofit real estate. That percentage in the quarterly data has ranged from a high of 16.9% in 1974 to a low of 7.3% in Q2 2005, a couple of quarters before the peak in the residential real estate bubble.

For those normal people who don’t know what the MACD is or even what it stands for, it is the Moving Average Convergence-Divergence. It is a momentum oscillator closely followed by many market participants. When the faster moving mav breaks the slower moving mav (up or down) we get a key buy or sell signal.

We may be about to break downwards on the monthly S&P chart which would give us a HUGE sell signal as was the case in Nov 2007 and the end of 1999 (also see attached note on The Killer Wave signal). If the S&P cracks we will be at 1.5% 10y US yields within a few days and probably heading to 1%. Watch this space.

Global financial markets are bracing themselves for another day of turmoil on Tuesday after credit ratings agency Standard & Poor's downgraded Italy late on Monday night.

The news came after panic gripped global markets as a fresh showdown over Greece renewed fears that the eurozone will be plunged into crisis. The rating for Italy, which has Europe’s second-largest debt load, was lowered from A+ to A, S&P said in a statement. The agency said the country's net general government debt is the highest among A-rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.

"In our view, Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges," S&P said in a statement. "The measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program."

S&P also said it lowered its outlook for Italy’s annual average growth to 0.7pc for 2011 to 2014, from a prior projection of 1.3pc. Earlier, as Greece and the bail-out "troika" of the International Monetary Fund (IMF), the European Union (EU) and the European Central Bank (ECB) thrashed out their differences, investors hit the sell button – hammering confidence and threatening the recovery.

Greece warned that it is just weeks away from default unless the troika releases an €8bn (£7bn) instalment of its original €110bn rescue. Creditors, though, stressed that they need evidence the country is delivering on its promised spending cuts.

In a robust exchange, Bob Traa, the IMF's representative in Greece, urged the government to outline plans to shrink a bloated public sector to avoid further emergency taxes – arguing that Athens should give up the "taboo" of firing civil servants. "I have compared Greece to a Mercedes that can go 120 kilometers per hour but is only going 40 because it has so much sludge in the engine," Mr Traa said.

In response, the Greek finance minister Evangelos Venizelos claimed European and international institutions were using Greece as a "scapegoat" to "hide their own lack of competence to manage the crisis". The country, he said, had been "blackmailed and humiliated".

He later admitted to holding "productive and substantive" talks with the bail-out "troika". These are set to continue, with sources indicating that a deal could be sealed as early as Tuesday. The stand-off spooked markets across the world. European and US indices slumped, and £28bn was wiped off the FTSE 100 as its four-day rally came to a juddering halt.

Signs of stress were once again evident in the bond markets on fears the crisis would rapidly spread, with yields on Italian and Spanish government debt climbing closer to the dreaded 6pc level widely seen as the point of no return. The euro weakened to a near seven-month low against the dollar, falling 1.2pc to $1.3631. Sterling fell to a nine-month low against the dollar. The Italy downgrade wiped around 70 points off the 24-hour Dow. The euro/dollar slumped to 1.36. The FTSE 100 is now expected to open flat on Tuesday.

Greece must demonstrate that it can hit its deficit reduction targets but the deeper-than-expected recession, sluggish privatisation programme and the authorities' failure to collect taxes is jeopardising its efforts. Proposing roughly 100,000 job cuts by 2015, Mr Traa said: "This will inevitably require the closure of inefficient state entities as well as reductions in the excessively large public sector workforce and generous public sector wages, which in some cases are above those of the equivalent private sector workers."

Rejecting a new property tax, he added: "This will neither be economically or politically sustainable." Better would be a "much stronger resolve to tackle the problem of tax evasion".

Mr Venizelos accepted that Greece had "delayed" major structural reforms and that the tax collection system was ineffective. Preparing the country for more austerity, he said: "We cannot go forward without the true implementation of major structural reforms."

World Bank chief Robert Zoellick warned that the euro crisis now threatened a wider downturn. "The drop in markets and confidence could prompt slippage in developing countries' investment and a pull-back by their consumers, too," he said. Investors are now looking to the US Federal Reserve to help by restarting quantitative easing. The Fed meets on Tuesday and Wednesday to discuss the state of the economy and may decide to undertake more stimulus.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit rating cut this year. Prime Minister Silvio Berlusconi passed a €54bn austerity package this month that convinced the European Central Bank to buy its bonds after borrowing costs surged to euro-era records in August.

The European Central Bank must continue to keep Italian debt rates low to ensure Europe's fourth-largest economy doesn't fail, the International Monetary Fund's chief economist said Tuesday. If Rome implements declared budget measures, Italy should remain solvent, IMF's Olivier Blanchard said at a briefing on the world economic outlook.

Late Monday, Standard & Poor's downgraded Italy, leaving open the possibility of further downgrades. "If for some reason, the markets start to believe Italy's debt is not sustainable and start asking for eight, nine or 10% interest rates, then it's clear that Italy's debt is unsustainable," Blanchard said. "It's absolutely essential that somebody be there to make sure that interest rates are low and Italy's debt is sustainable," he said.

So far, that role has been played by the ECB as it buys Italian bonds to help prop up Rome's debt. "It's a very important role" for the ECB to play, Blanchard added. But European officials suggest the EUR500 billion ($685 billion) bailout fund could also be used to buy sovereign bonds once member countries ratify a July 21 agreement.

The IMF warned in its economic outlook that if European policy makers don't act fast to contain the sovereign-debt crisis, it could plunge the U.S. and European Union economies into a deep recession.Blanchard said that downside scenario could materialize at any moment. Governments don't have the luxury of time, he said.

The IMF warned that if growth in Italy was 1 percentage point below its forecast, the debt-to-output ratio would jump 20% of GDP. That would put Italian debt-to-GDP levels up to 140%, around the same level that Greece's debt is expected to peak at.

Still, Carlo Cottarelli, head of the IMF's fiscal affairs department, estimates that Rome's budget plan can lower the country's deficit to about 1% of output in 2013. He said the government needs to do much more to boost growth, however, including increased competition throughout several of its major sectors.

International lenders told Greece on Monday it must shrink its public sector to avoid running out of money within weeks, as investors spooked by political setbacks in Europe dumped risky euro zone assets. Adding to concerns, Standard & Poor's cut its ratings on Italy in a major surprise that threatens to stoke fears of contagion in the debt-stressed euro zone.

Greece is near a deal to continue receiving bailout funds, a Greek finance ministry official said after a conference call with lenders, though "some work still needs to be done." U.S. stocks recovered some of their losses on the news. Greek Finance Minister Evangelos Venizelos held what Greece termed "productive and substantive" talks by telephone with senior officials of the European Union and International Monetary Fund after promising as much austerity as necessary to win a vital next installment of aid.

The talks will resume on Tuesday evening after experts meet through the day. Earlier, the IMF's representative in Greece spelled out steps Athens must take to secure the 8 billion-euro loan it needs to pay salaries and pensions next month. "The ball is in the Greek court. Implementation is of the essence," Bob Traa told an economic conference.

Additional savings measures were required to cut the public deficit to a sustainable level and reduce the public sector's claim on resources -- code for axing jobs and cutting pay and pensions -- while improving tax collection rather than adding further taxes, Traa said.

Venizelos said Greece would do what was needed to get more funds but would not be made a scapegoat by euro zone policymakers who had failed to tackle the region's debt woes. European stocks and the euro fell sharply on fears of a Greek default, compounded by the failure of EU finance ministers to agree new steps to resolve Europe's debt crisis at weekend talks, and another regional election defeat for German Chancellor Angela Merkel.

The euro fell about 0.5 percent in early Asian trade on Tuesday after S&P cut its rating on Italy, citing weakening economic growth prospects and a fragile ruling coalition. In a sign of mounting stress, yields on Italian and Spanish bonds rose further above 5 percent despite six weeks of European Central Bank buying to stabilize them. The cost of insuring peripheral debt against default also rose.

"There will be additional volatility in the global financial markets heading into the end of the month as the pressure to get Greece and others to enact their reforms will be white-hot intense," said Andrew Busch, global currency strategist at BMO Capital Markets in Chicago.

The euro zone debt crisis is now dominating the thoughts of policymakers worldwide with the United States, in particular, pushing for more dramatic action from Europe's leaders. President Barack Obama and Germany's Merkel spoke by telephone on Monday -- the latest of several calls between the two leaders -- and agreed that "concerted action" would be needed in the coming months to address it.

Emerging economies are also worried about being hurt by a deepening of the crisis in Europe. A Brazilian official said Brazil will propose this week that it and other large emerging economies make new funds available to the IMF to help ease the crisis in the euro zone.

"A new and larger risk looms. The drop in markets and confidence could prompt slippage in developing countries' investment and a pull back by their consumers too," World Bank chief Robert Zoellick said ahead of Group of 20 talks and an IMF/World Bank meeting in Washington later in the week.

Without its next loan tranche, Athens says it will run out of cash in mid-October. A default would threaten contagion to larger euro zone economies such as Italy and hammer European banks with heavy exposure to Greece.

Prime Minister George Papandreou canceled a planned trip to Washington and the United Nations at the last minute and returned home in response to the crisis. A senior Greek government official told Reuters the EU/IMF inspectors expect a new property tax unveiled last week to yield just half the two billion euros targeted this year.

Greek media published a list of 15 austerity measures it said the troika was demanding the Socialist government implement to receive the next tranche of aid. They included firing another 20,000 state workers, cutting or freezing state salaries and pensions, increasing heating oil tax, shutting down loss-making state organizations, cutting health spending and speeding up privatizations. The European Commission said it was not asking Athens to adopt any additional austerity steps on top of what had already been agreed in the Greek reform program.

Public Support LackingThe IMF's Traa acknowledged that the IMF/EU bailout plan lacked public support and said there was plenty of goodwill to give Greece more time for its adjustment program in a weaker-than-expected economy. He said the economy was set to contract by 5.5 percent this year and 2.5 percent in 2012.

Asked whether Greece would get the next loan tranche, finance minister Venizelos told Reuters: "Yes, of course." Even if it does, many economists and investors believe Athens will default on its debt mountain -- more than 150 percent of gross national product -- perhaps within months.

Former IMF chief Dominique Strauss-Kahn joined the chorus on Sunday, saying Greece's debt must be cut and government and private creditors should take losses now. "(EU) governments are not solving things, they are kicking the problem down the road, and the snowball is growing...," he told French television. Uncertainty over Greece was compounded by another political shock in Germany at the weekend.

The sixth regional election defeat this year for Merkel's center-right coalition on Sunday raised questions about the stability of her government and her ability to push through more euro zone rescue measures. Her Free Democratic (FDR) junior coalition partners crashed out of Berlin's regional assembly with 1.8 percent of the vote, raising pressure from some party activists for a more Euroskeptical line.

Leaders of both the Bavarian Christian Social Union (CSU) and the FDR have raised the prospect of Greece defaulting and possibly having to leave the 17-nation single currency area, ignoring rebukes from the chancellor for alarming markets. Merkel said on Monday it would send a disastrous political message if euro zone members could be thrown out of the bloc because they faced difficulties. Instead, she advocated tougher rules to force euro states to obey budget discipline.

German lawmakers are due to vote on September 29 on reforms agreed by euro zone leaders in July to allow the European Financial Stability Facility to buy government bonds in the secondary market, give states precautionary loans and lend to recapitalize banks. Merkel insisted she would win the vote.

In another illustration of the pressures on her, German central bank chief Jens Weidmann told parliament that planned measures to beef up the euro zone's rescue fund would not encourage countries to put their budgets in order.

Last week Treasury Secretary Timothy Geithner pressed euro zone finance ministers apparently in vain to take stronger action to stop the sovereign debt crisis spreading. One of his predecessors, Lawrence Summers, said in a Reuters column that all nations should pressure Europe to go beyond "grudging incrementalism" to recapitalize banks, and revive economic growth.

The Federal Reserve is expected to ease monetary policy at its two-day policy meeting this week – investors’ only uncertainty is how aggressively it will move. "Given the weakness of the incoming economic data, the Fed is now almost certain to do something, but exactly what is still not entirely clear," said Paul Ashworth, chief US economist at Capital Economics.

Investors expect easing in the form of the central bank selling some of its short-term Treasury holdings in order to buy longer-dated bonds, namely the 10-year sector, a policy move dubbed Operation Twist. An aggressive "twist" is seen by economists and traders involving the Fed selling between $300bn and $400bn of shorter-dated Treasuries and buying longer-dated bonds. The 10-year sector, for example, strongly influences mortgage and company borrowing costs.

The rationale behind lowering long-term bond yields is that it will enable homeowners to cut their borrowing costs, encourage greater borrowing and investment, while pushing more investors to leave government bonds and buy riskier assets.

The market’s drumbeat for Operation Twist helped propel the 10-year Treasury yield down to a 60-year low of 1.88 per cent last week, but expectations have subsequently moderated, due to some apprehension the Fed’s twist may be less aggressive, pushing the yield back above 2 per cent.

An alternative policy option could involve the Fed cutting the 0.25 per cent interest rate paid on excess reserves, or IOER, held at the central bank, in the hope banks lend more funds into the broad economy. In turn the Fed could well elect to undertake a modest "twist" in conjunction with cutting its overnight rate. "The Fed may cut the interest on overnight reserves and that could result in less Treasury purchases under a twist policy," said Michael Pond, strategist at Barclays Capital.

The benefits of cutting IOER may have risen somewhat, but the costs are considerable. A cut would undermine money markets that are already functioning poorly and so the ratio of reward to risk may well be too low to persuade the Fed to act. While both the Fed and bond investors expect inflation to moderate, the recent rise in core inflation to a year-over-year rate of 2 per cent in August, may compel some policymakers to favour a less aggressive easing policy.

From the Fed’s point of view, higher inflation today may not be a barrier to further easing, unless it changes the expectation that a weak economy will drag inflation down over the next couple of years. "Looking ahead, I expect inflation to ease to about a 1.5 per cent annual pace next year," said John Williams of the San Francisco Fed in a recent speech. "My expectation that inflation will fall reflects the fact that the economy is performing so far below its potential."

But the high core inflation reading will strengthen the hands of policymakers such as Narayana Kocherlakota, president of the Minneapolis Fed, who argues that the rise in inflation may itself be an indicator that there is less slack in the underlying economy. Mr Kocherlakota dissented from the FOMC’s decision in August.

Also, clouding the outlook for interest rate policy are doubts that low rates will do much to boost the economy as it struggles for traction after the bursting of the mortgage and credit bubble in 2008.

"The problem with the economy is not low rates," said Eric Green, chief market economist at TD Securities. "Policy cannot force consumers to borrow, cannot force businesses to hire and invest, cannot force banks to lend, and cannot channel liquidity where it is most needed which is in small and medium-sized businesses," he added.

Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.

About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.

Bears say investors are abandoning stock managers because there’s no end in sight to the decline that pushed the Standard & Poor’s 500 Index within 2.1 percentage points of a bear market in August. Bulls say the retreat by individuals has been a reason to buy since the bull market began in March 2009 and withdrawals mean money is available to buy stocks in the future.

"When we’re getting close to a market bottom, the phone starts ringing off the hook and our clients want us to sell everything," Bruce McCain, who helps manage $22 billion as chief investment strategist at the private-banking unit of KeyCorp, said in a phone interview on Sept. 14. "Market bottoms are less about an improvement in the fundamental situation, whether the economy or outlook for earnings, and a lot more about getting rid of all the anxious investors."

Fund OutflowsAbout $177.7 billion has been removed during the past 30 months from mutual and exchange-traded funds that invest in U.S. shares as the benchmark gauge for American equity rallied as much as 102 percent, before falling 17.9 percent through Aug. 8. Investors pumped in $18.7 billion during the first four months of 2011, before removing about four times that amount since, according to the average of data from EPFR and ICI, the money managers’ trade group. The August estimate doesn’t include ETF data from ICI.

Bond funds added $42.3 billion from the end of April through July and started posting weekly outflows last month, according to ICI. Since the bull market began, fixed-income managers have received a net $666.4 billion.

The last time equity fund outflows exceeded $40 billion during a four-month period was in August 2010, the data show. The S&P 500, which completed a 16 percent decline the previous month, went on to gain 13 percent through November. Monthly outflows in the last two years exceeded $10 billion seven different times. The S&P 500 advanced the next month in five of those cases, according to Bloomberg data. The stock index dropped 1 percent to 1,204.09 at 4 p.m. New York time today.

Withdrawals accelerated in September and October 2008 as Lehman’s bankruptcy, the biggest in U.S. history, dragged down shares and spurred the worst financial crisis since the Great Depression. The S&P 500 dropped 30 percent in two months. Investors never got over that shock, said Walter "Bucky" Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama.

Banking Crisis ConcernNow, concern Greece will default and spur a banking crisis has driven the S&P 500 down 11 percent since April, leaving it trading at 13.3 times reported earnings, 20 percent less than the last trading session before Lehman fell.

"It’s the once burnt, twice shy phenomenon," Hellwig said in a telephone interview on Sept. 12. "Investors are much less risk tolerant than they have been in the past. You would think that someone would say, ‘I can take a little bit of risk, look at the P/E,’ but they just want to stay on the sidelines."

The benchmark gauge for U.S. equities advanced 5.4 percent to 1,216.01 last week, the third-biggest rally since 2009, after central bankers said they would provide dollar loans for European lenders and French President Nicolas Sarkozy and German Chancellor Angela Merkel said they’re convinced Greece will remain in the euro area. The index has lost 3.3 percent in 2011 and is now up 80 percent from its March 2009 low.

Manufacturing ContractionBears say the withdrawals foreshadow more declines. Stocks have fallen four straight months, losing 5.7 percent in August after economists lowered forecasts for global economic growth, manufacturing in the Philadelphia region contracted by the most in more than two years and a debate in Congress over the budget deficit prompted S&P to strip the U.S. of its AAA credit rating.

"The average investor is less financially and psychologically prepared for this increased volatility," Jason Brady, a managing director at Thornburg Investment Management Inc, who helps oversee about $76 billion from Santa Fe, New Mexico, said in a Sept. 15 telephone interview. "They’re staying out and there’s something of a secular move to a demand for income and safety."

Chances the global economy enters a recession have risen to 1-in-2, Nobel-prize winning economist Paul Krugman said Sept. 8. JPMorgan Chase & Co. sees the chance of the second recession since 2007 at 40 percent, according to a Sept. 7 note.

Bigger stock swings are leading individuals to sell shares, Brady said. The VIX, the benchmark measure of U.S. equity derivatives, surged 50 percent to 48 on Aug. 8 for the biggest increase since February 2007 after S&P lowered its rating on U.S. long-term debt to AA+. The VIX has averaged 20.43 over its 21-year history.

Frustrating Investors"The individual investor is very frustrated and at their wits’ end with the equity market, and it’s hard to blame them," Walter Todd, who helps manage $940 million at Greenwood Capital in Greenwood, South Carolina, said in a Sept. 16 telephone interview. "It’s certainly not going to help push the market higher if you’ve got that constant drain."

While BNY Mellon Wealth Management’s Leo Grohowski says he understands the aversion to equity price swings, valuations are too low to justify more selling. Of the 500 companies in the benchmark equity index, 331 had price-earnings ratios at the end of August lower than they were when the year began, data compiled by Bloomberg show.

'Lack of Confidence'"There is this lack of confidence in equities as an asset class just due to the volatility," Grohowski, the chief investment officer for BNY Mellon, which oversees $171 billion, said in a telephone interview on Sept. 15. "But for investors who are long term and intermediate term, the market is undervalued. Now would not be a wise time to be reducing equity exposure because there’s an awful lot of bad news or expectations already priced in to the market."

Outflows following September 2008 lasted through March 2009. During the last three months of 2008, companies were reporting their fourth quarter of shrinking earnings and the U.S. jobless rate was halfway through its climb to the highest level since 1983. Gross domestic product slid 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the most of any recession since the 1930s, according to Commerce Department data.

Now, investors are withdrawing funds after companies beat profit estimates for 10 straight quarters. The world’s largest economy posted two years of growth and economists are calling for GDP to expand 1.6 percent in 2011 and 2.2 percent in 2012, according to the median estimates compiled by Bloomberg.

Hoarding CashCorporations have been hoarding cash and paying down borrowings. The S&P 500’s net debt to earnings before interest, tax, depreciation and amortization ratio is down to 2.5 from 5 in the second quarter of 2008, data compiled by Bloomberg show. This year’s earnings will increase 18 percent to a record $99.57 a share and break $100 next year, according to the data.

DirecTV in El Segundo, California, is trading at 14.4 times reported earnings, a valuation 14 percent below the level at the end of 2008. Since the third quarter of 2009, profits at the largest U.S. satellite-television provider increased an average 64 percent each quarter. They’re forecast to rise 26 percent next year, according to analyst estimates compiled by Bloomberg.

Earnings at Dow Chemical Co. retreated during the financial crisis. While profits more than doubled in every quarter of 2010, the shares are down 17 percent this year. The largest U.S. chemical maker fired workers, shut plants and sold assets to bolster earnings. Since 2009, the Midland, Michigan-based company has posted better-than-estimated sales in all but one period.

When fund flows show investors bailing out of stocks at the rate they are now, it’s usually bullish, Brian Barish, the Denver-based president of Cambiar Investors LLC, which oversees about $8 billion, wrote in a Sept. 15 e-mail.

"The five months after Lehman were an epic buying opportunity, yet investors liquidated en masse," Barish said. "Retail unfortunately tends to time things poorly. I don’t expect the current situation to be all that different."

The expectation that China might swoop down and rescue the euro in its hour of need is running high. Premier Wen Jiabao last week told a meeting of the World Economic Forum that "China is willing to give a helping hand, and we’ll continue to invest there." But those expecting China to offer anything more than symbolic assistance will soon be disappointed.

China knows that greater eurozone stability is in its national interest. The European Union is its second largest trading partner, and a disorderly collapse in Greece and other southern European countries would have dire consequences for Europe’s economic prospects. Neither turmoil in currency markets, nor sharp changes to trade flows, nor potential moves towards greater protectionism would be at all welcome in Beijing.

More strategically, the euro’s ongoing success is vital if China is ever to escape the "dollar trap" that currently ensnares its economy. Analysts believe that two thirds of China’s $32,000bn foreign reserves are dollar-denominated, leaving her constantly fearful of a falling dollar. China’s long-term goal is to make the RMB an international currency, but this will take time. In the meantime, her interests are clearly served by a strong euro.

For all that, however, any more than notional support for the eurozone would come with significant political risks. China isn’t stupid: it can see that the deadlock over Greece is less about money, and more about political will. To end the crisis every EU country, starting with Germany, must put aside its short-sighted self-interest. But with both Germany’s people and politicians so divided, this isn’t going to happen.

Put simply, investing in Greek, Portuguese, Irish and even Italian government bonds is now a hazardous activity. China is not going to go ahead without some form of iron guarantee from Germany and France which seems equally unlikely.

Naturally, Chancellor Angela Merkel and President Nicolas Sarkozy would be delighted if China took unilateral action, but that would put China in an awkward position – both risking a backlash in European public opinion, and doing nothing to move towards the type of more fiscally united Europe that, ultimately, is required to sustain the single currency.

Then, think of the money. Bailing out Greece is an expensive business: €110bn has already been spent by the EU and the International Monetary Fund, with around €120bn more still needed. Ought China really pay this amount to be a wealthy market economy?

True, it might buy some temporary friendships, perhaps to be used when another country files yet more anti-dumping charges against China at the World Trading Organisation. It would also be a public statement confirming China’s commitment to playing a more constructive role in the international capitalist system. But this, on its own, is hardly temptation enough.

Some thinkers, including CNN’s Fareed Zakaria, have even suggested that China should be bribed to help out. Ideas include offering a bigger role in the international financial system, or pledging that a Chinese candidate becomes the next head of the IMF. Yet even here, China may not be ready. There is a serious shortage of qualified candidates for the latter option; the former seems improbable for a country whose currency will not be fully convertible for some time.

The most likely outcome, therefore, is that China will risk almost none of its extensive foreign reserves to rescue the euro. It may buy some small symbolic quantity of southern European bonds, as an ersatz commitment to the future of the EU. But, in the end, China is an outsider. It knows that America is retreating from European affairs, but it is not yet ready to take its place. As seen from Beijing, the euro is a European affair. And the Europeans will have to make right their own mistakes.

The writer is director and professor at the China Center for Economic Research at Peking University.

Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

The recent debt exchange deal Europe offered Greece was a rip-off, providing much less debt relief than the country needed. If you pick apart the figures, and take into account the large sweeteners the plan gave to creditors, the true debt relief is actually close to zero. The country’s best current option would be to reject this agreement and, under threat of default, renegotiate a better one.

Yet even if Greece were soon to be given real and significant relief on its public debt, it cannot return to growth unless competitiveness is rapidly restored. And without a return to growth, its debts will stay unsustainable. Problematically, however, all of the options that might restore competitiveness require real currency depreciation.

The first of these options, a sharp weakening of the euro, is unlikely while the US is economically weak and Germany über-competitive. A rapid reduction in unit labour costs, through structural reforms that increased productivity growth in excess of wages, is just as unlikely. Germany took 10 years to restore its competitiveness this way; Greece cannot wait in depression for a decade.

The third option is a rapid deflation in prices and wages, known as an "internal devaluation". But this would lead to five years of ever-deepening depression, while making public debts more unsustainable.

Logically, therefore, if those three options are not possible, the only path left is to leave the eurozone. A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets that abandoned their currency pegs.

Of course, this process will be traumatic. The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks and companies would surge. Yet these problems can be overcome. Argentina did so in 2001, when it "pesified" its dollar debts. America actually did something similar too, in 1933 when it depreciated the dollar by 69 per cent and repealed the gold clause. A similar unilateral "drachmatisation" of euro debts would be necessary and unavoidable.

Major eurozone banks and investors would also suffer large losses in this process, but they would be manageable too – if these institutions are properly and aggressively recapitalised. Avoiding a post-exit implosion of the Greek banking system, however, may unfortunately require the imposition of Argentine-style measures – such as bank holidays and capital controls – to prevent a disorderly fallout.

Realistically, collateral damage will occur, but this could be limited if the exit process is orderly, and if international support was provided to recapitalise Greek banks and finance the difficult fiscal and external balance transition. Some argue that Greece’s real GDP will be much lower in an exit scenario than in the hard slog of deflation. But this is logically flawed: even with deflation the real purchasing power of the Greek economy and of its wealth will fall as the real depreciation occurs.

Those who claim contagion will drag others into the crisis are also in denial too. Other peripheral countries have Greek-style debt sustainability and competitiveness problems too; Portugal, for example, may eventually have to restructure its debt and exit the euro too.

Illiquid but potentially solvent economies, such as Italy and Spain, will need support from Europe regardless of whether Greece exits; indeed, a self-fulfilling run on Italy and Spain’s public debt at this point is almost certain, if this liquidity support is not provided. The substantial official resources currently being wasted bailing out Greece’s private creditors could also then be used to ringfence these countries, and banks elsewhere in the periphery.

A Greek exit may have secondary benefits. Other crisis-stricken eurozone economies will then have a chance to decide for themselves whether they want to follow suit, or remain in the euro, with all the costs that come with that choice. Regardless of what Greece does, eurozone banks now need to be rapidly recapitalised. For this a new European Union-wide programme is needed, and one not reliant on fudged estimates and phoney stress tests. A Greek exit could be the catalyst for this approach.

The recent experiences of Iceland, along with many emerging markets in the past 20 years, show that the orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness and growth. Just as in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained.

Like a broken marriage that requires a break-up, it is better to have rules that make separation less costly to both sides. Breaking up and divorcing is painful and costly, even when such rules exist. Make no mistake: an orderly euro exit will be hard. But watching the slow disorderly implosion of the Greek economy and society will be much worse.

Slower economic growth throughout Europe, and probably in the United States. Huge losses by major European banks. Declining stock markets worldwide. A tightening of credit, making it harder for many borrowers to get loans.

As concerns grow that Greece may default on its government debt, economists are starting to map out possible outcomes. While no one knows for certain what will happen, it’s a given that financial crises always have unexpected consequences, and many predict there will be collateral damage.

Because of these fears, Greece is working frantically in concert with other European nations to avoid default, by embracing further austerity measures it has promised in return for more European bailout money to help pay its debts.

But some economists believe default may be inevitable — and that it may actually be better for Greece and, despite a short-term shock to the system, perhaps eventually for Europe as well. They are beginning to wonder whether the consequences of a default or a more radical debt restructuring, dire as they may be, would be no worse for Greece than the miserable path it is currently on.

A default would relieve Greece of paying off a mountain of debt that it cannot afford, no matter how much it continues to cut government spending, which already has caused its economy to shrink.

At the same time, however, there is a fear of the unknown beyond Greece’s borders. Merrill Lynch estimates that the shock to growth in Europe, while not as severe as in the aftermath of the financial crisis of 2008, would be troubling, with overall output contracting by 1.3 percent in 2012.

While other countries have defaulted on their sovereign debt in recent times without causing systemic contagion, analysts weighing the numbers on Greece note that its debt is far higher, so the ripple effects could be more serious.

Total Greek public debt is about 370 billion euros, or $500 billion. By comparison, Argentina’s debt was $82 billion when it defaulted in 2001; when Russia defaulted, in 1998, its debt was $79 billion.

Economists also warn that a Greek default could put further pressure on Italy, the euro zone’s third-largest economy, which, though solvent, is struggling to enact austerity measures and find a way to stimulate growth. Moreover, Italy’s government debt is five times the size of Greece’s, and concerns about Italy’s ability to meet its obligations could grow if Greece defaults.

In a new sign of trouble for the country, Standard & Poor’s on Monday cut Italy’s credit rating by one notch to A, citing its weakening economy and limited political response. "Orderly or not, we have no idea what the effect of a default would be on other countries, especially Italy," said Peter Bofinger, an economist who advises the German Finance Ministry. "If there is just a 5 percent chance that this affects Italy, then you don’t want to do it."

In part, what would happen in the wake of a Greek default would depend on whether European leaders could create a firewall to control the damage from spreading widely. That would require officials to come together in ways they so far have not been able to, because it is politically unpopular in some countries to spend many billions more bailing out Greece.

In particular, work on transforming Europe’s main financial rescue vehicle, the 440 billion euro European Financial Stability Facility, would have to be fast tracked so that it would be in a position to buy European bonds and, crucially, provide emergency loans to countries that need to inject money into capital starved banks. Differences over the best way to go forward so far have delayed approval of the expanded fund.

Bailing out the banks will be crucial if Greece either defaults or imposes a hard restructuring, whereby banks would be forced to take a larger loss on their holdings compared with the fairly benign 21 percent losses that they are now being asked to accept as part of the second, 109 billion euro bailout package set for Greece in June.

Merrill Lynch, in a recent report on the contagion effect of a worst-case situation in which a severe Greek debt restructuring results in other weak European countries having to take a hit on their bonds, estimated that overall European bank losses could be as high as $543 billion. French and German banks would be the hardest hit, because they are among the biggest holders of Greek debt.

"We believe losses could be substantially larger through deleveraging and second-round effects, contagion from failure of individual banks from or outside the periphery, exposures of the nonbank financial sector," the Merrill Lynch report concluded.

While a 60 to 70 percent debt write-down seems extreme, it actually represents the market expectation, with most Greek debt now trading below 40 cents on the dollar.

A Greek default also would be costly to the European Central Bank, the Continent’s equivalent of the Federal Reserve. To help prop up Greece, the central bank is believed to have bought about 40 billion euros in Greek bonds at much higher prices than where they now trade. If the central bank were forced to take a major loss on its Greek bonds, it too would need a capital infusion. And the burden would most likely fall on Germany.

Analysts also say the seriousness of the crisis will depend on whether Greece stays within the euro common-currency zone or is forced to leave it, and return to the drachma as its national currency.

Willem Buiter, the chief economist at Citigroup, presents two possible default outcomes. In the first, Greece forces private sector creditors to take a loss on their bonds of 60 to 80 percent but manages to stay inside the euro zone by keeping current on the smaller amount that it owes its official lenders, like the European Union and the I.M.F. While technically a default, the loss would not be an outright repudiation of Greece’s debt and the contagion could, in theory, be contained.

One big unknown revolves around the fact that, unlike other countries that have defaulted on their debts in the past, Greece does not have its own currency. The potentially more dangerous default outcome is if Greece decides to leave or is forced to leave the euro, according to Mr. Buiter. Then, Mr. Buiter believes, the debt write-off would approach 100 percent and the effects on international markets could be much more serious.

Offsetting this, to some extent, is the fact that exiting the euro zone and re-adopting the drachma would enable Greece to devalue its currency versus the rest of Europe, and help it become more competitive, perhaps spurring economic growth.

For the moment, Greek officials are adamant that neither a default nor a euro exit and devaluation is in the cards. One senior policy maker in Greece’s Finance Ministry, who declined to be identified because of the delicacy of the matter, even offered to send his questioner a case of 2005 Dom Perignon Champagne if Greece ever repudiated its debt.

But close followers of Greece’s budget dynamics point to the fact that, despite the country’s deficit woes, by next year Greece is likely to have achieved a primary budget surplus, meaning that after taking out the high levels of interest it pays on its debt, it will be running a surplus.

History shows that a country tends only to take such a drastic step as cutting ties with its international lenders when it has tightened its belt enough to achieve a budget surplus, and it is only payments to its bankers that is keeping it in the red. Such was the case in most of the recent country defaults, including Argentina, Ecuador, Indonesia and Jamaica, economists at the I.M.F. found in a paper published last year that addressed when a country finds its interest is served by default.

"My view is that it is very much in Greece’s interest to default now, as there is no prospect that it can repay its debt," said Desmond Lachman, a former I.M.F. economist at the American Enterprise Institute. "If it is inevitable that an insolvent Greece is going to have to restructure, it would be better for Greece to do it now."

Who says regulators are only good for slamming the barn door after the horse has bolted?

Back in April, the Financial Stability Board (FSB), an international super-regulator, wrote a prescient if less than catchily-titled paper "Potential financial stability issues arising from recent trends in Exchange Traded Funds (ETFs)".

Its central warning - that ETFs are not the cheap and transparent vehicles the marketers would have us believe - was spot on. When UBS's $2bn black hole hit the screens on Thursday, no one who read the FSB report was surprised to see the words ETF and rogue trader in the same sentence.

The past ten years have seen an explosion in the popularity of ETFs. In part this reflects some of their acknowledged benefits – relatively low costs and the ability for investors to trade them throughout the day. A third claim, that ETFs are simple products, may once have been true but it no longer holds water. Many of these funds are now fiendishly complicated and way beyond the comprehension of the individual investors and professionals alike who are buying them.

Here are just a few of the reasons why ETFs are not all they are cracked up to be.

First, around half of the ETFs in Europe today do not match the index they are designed to track by holding all of its constituent shares. Unlike the plain vanilla "full replication" ETFs which do, 45pc of the market is in the form of so-called "swap-based" ETFs which instead use derivative agreements, often with investment banks, to simulate the performance of the underlying assets.

Derivative trades add a second layer of uncertainty to the unavoidable ups and downs of the market, the counterparty risk that the organisation on the other side of the contract might go bust. Even worse, the provider of the ETF might sometimes be a part of the same organisation as the derivatives desk carrying out the swap.

When a bank acts in this dual capacity, and because of inadequate disclosure rules, there is a significant potential for a conflict of interest in which the end investor comes off second best. Because there is currently no obligation for the basket of assets used as collateral to actually match the assets the ETF purports to be tracking, a bank may choose to hold less liquid assets to back the fund which it could struggle to sell if too many investors want out at the same time.

The problem of liquidity is an increasing issue with ETFs because of the way in which the funds have branched out into other asset classes such as fixed income and commodities. In these markets, liquidity is typically thinner than in big equity markets such as those measured by the S&P 500 or FTSE 100.

Liquidity is only ever a problem at times of market stress. Unfortunately, that is precisely the time when it matters, as investors in some real-estate unit trusts discovered a few years back when the property market turned down and, funnily enough, their managers were unable to sell enough properties to pay back redeeming unit holders. Investors were locked in.

A big unrecognised risk with ETFs is related to the ease with which traders – hedge funds in particular – are able to use the funds to short markets. For reasons which I'm not sure I could explain even if I had the space, it is possible for the number of shares sold short in an ETF to massively exceed the actual number of shares available. It has been suggested that the "Flash Crash" of May 2010, in which US shares fell 1,000 points before bouncing back in a matter of minutes, was a consequence of this – around 70pc of cancelled trades at the time were reported to be for ETFs.

Like many financial innovations – most obviously, the alphabet soup of mortgage-related debt obligations that triggered the financial crisis – ETFs started out as a good idea, and for some investors, in their most transparent form, they remain so. But, as so often in the financial services industry, a tangled web of complexity has rapidly developed.

What was once a straight-forward means of gaining access to a market has turned into a minefield for investors and one which, as UBS discovered in the middle of the night last week, has the potential to become the next toxic scandal.

Essentially, the report says that regulators should watch these relatively new products because they can be molded into just about anything, and they're hot thanks to the extended period of low interest rates, which is pushing investors to create leverage in new areas.

And because they're dangerous.

The board found that three things about ETFs pose potential risks to financial stability:

The provider might might face difficulties liquidating the collateral and may be faced with the difficult choice of either suspending redemptions or maintaining them and facing a liquidity shortfall and the bank level. The expectation of on-demand liquidity may create the conditions for acute redemption pressures on certain types of ETFs in situations of market stress, which could in turn affect the liquidity of the large asset managers and banks active in this market.

A bank default could result in contagion. Since the swap counterparty is typically the bank also acting as ETF provider, or a group of banks acting as counterparties, investors may be exposed if the bank defaults. Therefore, problems at those banks that are most active in swap-based ETFs may constitute a powerful source of contagion and systemic risk.

ETFs might create risks for market liquidity. In the event of a market sell-off or an unwind in any particular ETF, there is a risk that investors massively demand redemption. Were redemptions to be made in cash, this could raise issues as to the exit strategies and liquidity risk of ETF providers and swap counterparties. The use of ETFs as collateral in a long chain of secured lending and rehypothecation may create operational risks and contribute to the build up of leverage.

The FSB brings up these risks in part because the ETF market has boomed recently. The boom can in part be traced to the current period of protracted low interest rates, which provides incentives for re-leveraging in non-standard market segments.

Whatever the reason, the industry grew at an average of 40% year over year over the past 10 years, says the report. And while most of that growth has been in "plain vanilla" ETFs (like the one that tracks the S&P 500 for example), that are backed by physical assets, in Europe much of that growth has been in "synthetic" ETFs that are created by entering into an asset swap (ie an OTC derivative), with a counterparty*. They up make much more of the ETF market in Europe, reaching 45% of that market.

And ETFs are an area where innovation is booming too. ETFs have branched out to other asset classes (fixed-income, credit, emerging markets, commodities) where liquidity is typically thinner and transparency lower.

Given their recent boom, their underlying assets (or lack thereof), and the relatively little that is understood about the risks they might pose, might ETFs be the new CDOs? The FT's Gillian Tett talked about this back in May.

The central problem is that the ETF sector – just like those “boring” CDOs five years ago – is currently in the grip of a wave of investor enthusiasm that risks turning a fundamentally sensible innovation bad... And some ETFs are now using leverage; others are starting to purchase riskier assets such as risky loans... And precisely because the market has exploded with such stunning speed, it may be changing flows in unpredictable ways.

Of course there are reasons to take all this with a grain of salt. For example: At the end of Q3 2010, the global ETF industry had $1.2 trillion in assets under management, which is tiny compared to the hedge fund industry, for example. And the new products (leveraged ETFs, inverse ETFs and leveraged-inverse ETFs) only represented 3% of the total ETF market in 2010.

But now we have two instances where "rogue traders" lost billions for their firms trading (or falsely accounting for trading) ETFs.

Of course it was allegedly made via fraudulent accounting and not any flaws inherent in the ETFs. But for products that are supposedly so transparent, some surprisingly large losses have resulted from a couple of back office employees trading them.

* The provider (typically a bank's asset management arm) sells ETF shares to investors in exchange for cash, which is then invested in a collateral basket, the return of which is swapped by the derivatives desk of the same bank for the return of an index.

Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

In total, Siemens has parked between €4bn ($5.4bn) and €6bn at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB. Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

It was not clear from which bank Siemens withdrew its deposits. A person familiar with BNP Paribas said, however, that it was not the bank involved. Siemens and the ECB declined to comment.

The company’s move came almost a year after Europe’s largest engineering conglomerate prepared itself for a future financial crisis by launching its own bank, an unusual move for an industrial group outside the car sector, where companies run big car financing and leasing businesses.

In an interview last December, Roland Châlons-Browne, chief executive of Siemens’ financial services unit, said its banking business would enable the group to tap the central bank for liquidity and deposit cash at the ECB. "In the case of another financial crisis, we will be able to broaden our flexibility and take out risk with our own bank," Mr Châlons-Browne said at the time.

Siemens does not only use the ECB as a haven; it also gets paid a slightly higher interest rate than it would get from a commercial bank. The ECB paid an average interest rate last week of 1.01 per cent for its regular offers of one-week deposits, under which it withdraws from the financial system an amount of liquidity equivalent to the amount it has spent on eurozone government bonds. That compares with an average overnight interest rate paid by eurozone banks of 0.95 per cent.

BNP Paribas chairman Michel Pébereau told reporters on Tuesday that his and other French banks have no need for new capital. "We have no need at the moment for any recapitalisation," Mr Pebereau told RTL. "The banks are holding up well ... We don’t need any type of aid today."

Saudi Arabia will spend $43 billion on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity.

Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the U.S. Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.

Unlike past booms, when Abu Dhabi bought English soccer club Manchester City and Qatar acquired a stake in luxury carmaker Porsche SE, Gulf nations pledged $150 billion in additional spending this year on their citizens. They will need to keep U.S. benchmark West Texas Intermediate crude oil at more than $80 a barrel to afford their promises, according to Bank of America Corp.

"A sharp increase in spending to accommodate social pressures has averted potential disquiet over governance in most countries, though in the longer-term economic reforms will be needed to buoy private-sector growth and job creation," Jean- Michel Saliba, a London-based economist at Bank of America, said in an e-mail Sept. 8. "Without the social spending, Gulf protests would possibly move the nations toward constitutional monarchy."

OPEC’s basket of crudes, a weighted average of the group’s main export grades, has been trading at above $100 since Feb. 21. The basket price was $110.69 a barrel on Sept. 16 while WTI on the New York Mercantile Exchange closed that day at $87.96.

Arab SpringTunisia’s ouster of President Zine El Abidine Ben Ali in January set up the so-called Arab Spring, as protests led to the end of Hosni Mubarak’s 30-year reign in Egypt and threatened the Assad family’s hold on Syria.

Libya’s rebel council met Sept. 19 to form a cabinet after seven months of fighting to end Muammar Qaddafi’s 42-year rule. Yemeni President Ali Abdullah Saleh is under pressure to step down after 33 years running the Arab world’s poorest country. Unemployment is at 11 percent in the Middle East and North Africa and as high as 22 percent in Algeria, according to the United Nations Development Program.

Across Yemen’s northern border, in Saudi Arabia, OPEC’s biggest member is funding housing, salary increases and the creation of 60,000 new jobs at the interior ministry, according to royal decrees announced on March 18. At least 1 billion riyals ($267 million) has been allocated to the Saudi Ministry of Islamic affairs and The Commission for the Promotion of Virtue and Prevention of Vice after clerics backed a ban on domestic protests.

Religious FundingThe religious establishment’s new funds include 500 million riyals to restore mosques and 300 million riyals to support Islamic call and guidance offices, according to the decrees. Money is being spent on installing devices in public squares, markets and schools to deliver audio and video broadcasts with "advice and moral lessons," the Commission’s President Muhammad al-Eidy said in May.

"They probably feel like they’ve got to do a lot more spending this time and they are focusing on social spending, whereas previous investments were business or private-sector driven," said Gabriel Sterne, associate director in London at Exotix, an investment bank, and a former economist at the International Monetary Fund and the Bank of England.

$1 Trillion RevenueOPEC will need WTI at above $80 a barrel to maintain the increased social spending because the costs of Persian Gulf budget obligations have more than doubled since 2006 to $77, with Saudi Arabia needing an average $82, according to Deutsche Bank AG. OPEC’s basket price at more than $100 puts it on course to earn $1.01 trillion this year, the U.S. government said.

During the oil rally that peaked in 2008 before the onset of the global financial crisis, Abu Dhabi, holder of most of the U.A.E.’s crude reserves, pledged $22 billion to construct Masdar City, powered by renewable energy that would rest on concrete blocks under which electric driverless vehicles would transport residents. Qatar began building an academic hub, attracting American institutions such as Georgetown University in Washington and Texas A&M University in College Station, Texas, with funding from a government-run foundation.

Shoring Up SupportThis time, rulers are shoring up domestic support. Demonstrations in Saudi Arabia, the Arab world’s biggest economy, failed to take off in March as citizens were offered extra money for housing. Government employees had their salaries increased 15 percent and got two months extra pay. Kuwaitis received 1,000 dinars ($3,664) and free food for 13 months, state news agency KUNA said in January. Earlier this month, Qatar’s crown prince Sheikh Tamim bin Hamad al-Thani ordered 30 billion riyals ($8.2 billion) in civil servant salary increases and pension-fund allowances.

"As soon as the government announced handouts, people went out and bought cars," said John Stadwick, managing director of General Motors Co.’s Middle East operations. Sales in Saudi Arabia climbed as much as 48 percent a month since April, compared with a decline in February and March, he said.

Gulf nations are also aiding neighboring Sunni monarchies to prop up dynasties that have ruled parts of the Middle East for centuries. They pledged $20 billion for Oman and Bahrain to fend off protests and invited Morocco and Jordan to join the six-member Gulf Cooperation Council which will include economic assistance. In addition, newly democratic Egypt received $20 billion from Qatar and $4 billion from Saudi Arabia as the Gulf seeks to retain influence in the most populous Arab nation.

OPEC Spending RisesOf OPEC’s 12 members, nine increased 2011 budgets and of the remaining three, only Nigeria amended its budget lower, while the U.A.E. doesn’t disclose its public spending. Nigeria, Africa’s biggest oil producer, set up a $1 billion wealth fund in May split into an infrastructure fund, a future generations fund and a stabilization fund. Algeria’s cabinet approved a 25 percent budget increase to pay for the salary raise and food subsidies amid protests that have ended 19 years of emergency rule and led to a review of the election law.

OPEC decided against raising oil supplies at its June meeting even as Libya’s conflict curbed exports. Output of about 30 million barrels a day lags behind the 31.3 million barrels the world needs from the region in the third quarter, according to the International Energy Agency. Half of Saudi Arabia’s 8 percent increase in June production to 9.7 million barrels a day was used in its own power plants as domestic demand reached a record, data from the Paris-based IEA showed.

Cut Production"Saudi Arabia will cut back after its summer surge," said Leo Drollas, London-based chief economist at the Centre for Global Energy Studies, the researcher founded by former Saudi Oil Minister Zaki Yamani. "If it doesn’t trim now then prices might lurch downwards on lower demand, and it needs a minimum basket price of $90 for what it wants to do this year."

Oil in New York has dropped 25 percent since its April 29 high of $113.93 on concern demand will fall as Europe grapples with its debt crisis and unemployment in the U.S. hovers at 9 percent. WTI averaged $92.66 in the past year.

The OPEC basket will stay above $100 a barrel for the rest of this year, according to forecasts from five banks and consultants, including Barclays Plc and Sanford C. Bernstein & Co. Its previous record period above this level was from April 7 to Sept. 8, 2008. OPEC’s members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Not all the spending initiatives work right away, even though citizens praise the changes.

Give More PowerAbu Dhabi plans to provide more services to poorer citizens by focusing on communities like Ras Al Khaimah after academics and journalists signed an online petition calling for the country’s Federal National Council, an advisory body with no executive authority, to be chosen by universal suffrage and given more power.

Less than a week after Mubarak’s ouster in Egypt, the city of 250,000 people got a visit from Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed Al Nahyan. Learning they lacked electricity, Sheikh Mohammed, who is next in line to the nation’s presidency, summoned a utility executive who arrived within two hours by helicopter. "Give them power now," he ordered.

Sheikh Mohammed "sat with the people and listened to our needs," said Yousuf al-Nuaimi, chairman of the Chamber of Commerce in Ras Al Khaimah, one of seven U.A.E. cities whose per capita income is 45 times less than Abu Dhabi. The Crown Prince promised electricity to the northern sheikhdom, home to one of five pro-democracy activists arrested this year, from a plant in nearby Fujairah and 1 billion dirhams ($270 million) for road and housing improvements, al-Nuaimi said.

Seven months after the visit, Ras Al Khaimah is still waiting for power but residents don’t blame the crown prince. "Abu Dhabi is not the problem," al-Nuaimi said. "The Federal Water and Electricity Authority is the problem. They need to do the connection but they are not. I hope the next step will be for Abu Dhabi to take over FEWA so that we can enjoy the power they promised us."

More European banks could need recapitalization as the sovereign debt crisis intensifies, justifying an extension of special rules of government assistance for banks, the European Union's antitrust chief said Tuesday.

"Finally and sadly, as the sovereign debt worsens, more banks may need to be recapitalized, on top of the nine signaled in the July stress tests," EU competition commissioner Joaquin Almunia said in a speech in Brussels. "This is why it is so important to resolve the sovereign debt crisis without any further delay."

Banks across Europe received government assistance in the wake of financial crisis, including Belgium's Dexia SA, France's Société Générale SA and Germany's Commerzbank AG. While some have paid it back, others are still partially-state owned. European bank shares have also been hammered recently over fears about the debt they hold from Greece, Italy and other weak euro-zone countries. Therefore, Mr. Almunia said he would ask the EU to extend special rules put in place during the crisis.

"I would have preferred to go back to normal rules sooner and this was indeed my intention until the summer," Mr. Almunia said. "But the situation we are facing these days calls for an extension of the existing state aid crisis regime ... this means that next year the rescue and restructuring of banks will continue to be assessed on the basis of the present rules." He warned governments this is no excuse for them not getting their house in order.

"Banks should first try to finance themselves on the markets, and take all possible measures ... before they turn to the use of public backstops, which should be used as a last resort," Mr. Almunia said. "But a postponement certainly doesn't mean a blank check for banks and their governments."

We’ve known for a long time that this is no ordinary recession. Everyone has been saying it, including the International Monetary Fund. Yet there has been a curious reluctance to admit the likely reality of slow growth and insipid recovery for advanced economies in the official forecasts. Well now the International Monetary Fund has finally capitulated and gone some way to recognising the truth.

In its latest World Economic Outlook (WEO), published on Tuesday, the IMF has again sharply slashed its forecast for world, US, European and UK growth. The biggest downgrade is for the US, where the forecast has been cut by 0.6 percentage points for this year and 0.7 percentage points for next, to 1.6pc and 1.9pc respectively. That’s no-where near enough growth to generate the sort of employment creation President Barack Obama needs to ensure re-election.

The UK doesn’t look much better. Against the June forecasts, growth has been cut by 0.4 per centage points for this year to 1.1pc and 0.7 percentage points for next to 1.6pc. The growth George Osborne, the Chancellor, so desperately needs to ensure his deficit reduction programme remains on track is seeping away. The Office for Budget Responsibility is going to have some tough messages for the Chancellor to accompany the autumn statement in November. It seems ever more likely that with continued weak growth, the OBR will revise up its estimate of the structural deficit, and therefore the consolidation that needs to be done to meet the Government's fiscal mandate.

And the IMF says that countries such as the UK enjoying historically low bond yields should consider taking advantage of them to enact growth inducing policies if growth continues to fall short of expectations. Whether that means Mr Osborne is being urged to go slow on fiscal consolidation is less clear.

By way of explanation of its latest downgrades, the IMF cites four major factors. One; in the US, the handover from public to private demand is taking longer than the IMF expected. Two; the euro area debt crisis is proving more "tenacious" than the IMF thought it would be. Three; output has been hit by the disruptive effects on the global supply chain of the Great East Japan earthquake. Four; high oil prices exacerbated by rising geo-political tensions.

But here’s the really bad news. These forecasts are the IMF’s best guess at what will happen if everything now goes according to plan. They assume that the financial turmoil doesn’t again run out of control. Somewhat optimistically, the IMF also opines that the recent financial turmoil in the eurozone and elsewhere has only "delayed rather than derailed" stronger activity, so that by the end of 2012, growth will again be picking up.

Yet there are much darker scenarios, which the IMF admits are a "distinct possibility". In one such scenario outlined in the WEO, the IMF assumes that banks in the euro area suddenly need to absorb mark to market losses on sovereign debt which wipes 10pc off their capital, triggering another round of balance sheet de-leveraging.

At the same time, market expectations of growth in the US are revised down and there is some kind of real estate meltdown in Asia. Risk aversion would rise sharply once more, and given the limited room for fiscal and monetary policy to respond in advanced economies, a serious global slowdown would ensue. In such circumstances, the IMF reckons that US and euro area output would be more than 3 percentage points lower than the WEO forecasts for 2012, and 2.5 percentage points lower for Asia.

Such an outcome is not only possible, but some would say quite probable. Indeed, it is easy to imagine much uglier scenarios, most obviously, disorderly breakup and default in the eurozone.

What can be done to stave off disaster? In the US, the IMF suggests that the Federal Reserve stands ready with more quantitative easing. It also suggests that the US may need to ease off on fiscal consolidation. Since Christine Lagarde became managing director, the IMF has notably shifted its stance on deficit reduction for all advanced economies. But the WEO itself is all over the place on the issue.

Sometimes it seems to suggest that governments slow down the pace of consolidation to help growth, at others it is insistent that some countries stick to austerity commitments. There is no consistent message. I’m hoping to get more on what the IMF thinks the UK should be doing from the WEO press conference today.

I imagine the UK Treasury has primed IMF officials to stress the need to stick to plan A. That's the expected IMF message for public consumption, in any case. Privately, it may have a different view. I'm hoping to get more on this from the WEO press conference this morning. The overarching IMF stance seems to be that different countries should be doing different things, depending on their circumstances. This chimes with Mr Osborne's view, who of late has given up preaching fiscal austerity as the route for all.

In any case, with world finance ministers gathering in Washington later this week for the IMF’s annual meeting, there’s really only one subject on the agenda – Europe, Europe and Europe.Interestingly, Sir Mervyn King, Governor of the Bank of England, is breaking with precedent and not attending. He’s got my sympathies. The extraordinary proliferation of international meetings, few of which seem to advance the agenda one jot, would be enough to tax any man. In the spirit of burden sharing, it will be left to the deputy governor, Charlie Bean, to hold the Bank of England’s torch.

Will the governor be missing out on the crucial breakthrough – the international accord necessary finally to resolve the eurozone crisis and bring confidence back to America and Europe? Don’t hold your breath.

UPDATE: There was a little bit of clarification at the WEO press conference from the IMF's Jorg Decressin on what was meant by the idea that the UK should consider delaying some of its fiscal adjustment if activity continues to undershoot expectations. He said that growth would need to be "substantially" lower to justify a change in course. His remarks were echoed by Carlo Cottarelli, who is in charge of the IMF's "Fiscal Monitor".

Current plans were appropriate, he said, but the UK needed to remain flexible. There could be scope for slowing the pace of adjustment, but it was not what the IMF thought should be happening now. In other words, the IMF continues to toe the line on Plan A, for now at least. What the view will be a couple of months from now is another matter.

There was also a "call to arms" from Olivier Blanchard, the IMF's chief economist, for the eurozone to implement the July 21 agreement. Other measures to resolve the eurozone crisis must include an increase in the capital buffers of eurozone banks, if necessary by use of public money. Mr Blanchflower was concerned that banks would choose to increase their capital ratios through further deleveraging, which could trigger a second credit crunch and a drying up of credit across the eurozone.

The International Monetary Fund warned on Tuesday that the United States and the eurozone risk being plunged back into recession unless policymakers tackle the problems facing the world's two biggest economic forces.

In its half-yearly health check, the Washington-based fund said the global economy was "in a dangerous place" and that its forecast of a slow, bumpy recovery would be jeopardised by a deepening of Europe's sovereign debt crisis or over-hasty attempts to rein in America's budget deficit. "Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing," the IMF said as it cut its global growth forecast for both 2011 and 2012.

The IMF also cut its growth forecasts for the UK economy and advised George Osborne to ease the pace of deficit reduction in the event of any further downturn in activity. The IMF's World Economic Outlook cited the Japanese tsunami and the rise in oil prices prompted by the unrest in north Africa and the Middle East as two of a "barrage" of shocks to hit the international economy in 2011.

It said it now expected the global economy to expand by 4% in both 2011 and 2012, cuts of 0.3 points and 0.5 points since it last published forecasts three months ago. "The structural problems facing the crisis-hit advanced economies have proven even more intractable than expected, and the process of devising and implementing reforms even more complicated. The outlook for these economies is thus for a continuing, but weak and bumpy, expansion," the IMF said.

Speaking at a press conference in Washington, Olivier Blanchard, the IMF's economic counsellor, said there was "a widespread perception" that policymakers in the euro area had lost control of the crisis. "Europe must get its act together," Blanchard said, adding that it was "absolutely essential" that measures agreed by policymakers in July, including a bigger role for the European Financial Stability Fund (EFSF), should be made operational soon. "The eurozone is a major source of worry. This is a call to arms," he said.

Blanchard said the fund was cutting its growth forecasts because the two balancing acts needed to ensure recovery from the recession of 2008-09 have stalled. Governments were cutting budget deficits but the private sector was failing to make up for the lost demand. Meanwhile, the global imbalances between deficit countries such as the US and surplus countries such as China looked like getting worse rather than better.

"Markets have become more sceptical about the ability of governments to stabilise their public debt. Worries have spread from countries on the periphery of Europe to countries in the core, and to others, including Japan and the US, Blanchard said. He added that there was a risk of low growth, fiscal, and financial weaknesses could easily feed on each other.

"Lower growth makes fiscal consolidation harder. And fiscal consolidation may lead to even lower growth. Lower growth weakens banks. And weaker banks lead to tighter bank lending and lower growth." As a result, there were "clear downside risks" to the fund's new forecasts.

Developing nations lead the wayIn its report, the IMF said it expected the strong performance of the leading emerging nations to be the main driving force behind growth in the world economy. China's growth rate is forecast to ease back slightly, from 9.5% in 2011 to 9% in 2012, while India is predicted to expand by 7.5% in 2012 after 7.8% growth in 2011. Sub-Saharan Africa is expected to continue to post robust growth, up from 5.2% in 2011 to 5.8% in 2012.

The rich developed countries, by contrast, are forecast to grow by just under 2%, slightly faster than the 1.6% pencilled in by the IMF for 2011. "However, this assumes that European policymakers contain the crisis in the euro periphery area, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate."

"The risks are clearly to the downside," the IMF added, pointing to two particular concerns – that policymakers in the eurozone lose control of the sovereign debt crisis, and that the US economy could weaken as a result of political impasse in Washington, a deteriorating housing market or a slide in shares on Wall Street. It said the European Central Bank should consider cutting interest rates and that the Federal Reserve should stand ready to provide more "unconventional support".

It said: "Either of these two eventualities would have severe implications for global growth. The renewed stress could undermine financial markets and institutions in advanced economies, which remain unusually vulnerable. Commodity prices and global trade and capital flows would likely decline abruptly, dragging down growth in developing countries."

The IMF said that in its downside scenario, the eurozone and the US could fall back into recession, with activity some three percentage points lower in 2012 than envisaged. Currently, the fund is expecting the US to grow by 1.8% in 2012 and the eurozone by 1.1%.

"In the euro area, the adverse feedback loop between weak sovereign and financial institutions needs to be broken. Fragile financial institutions must be asked to raise more capital, preferably through private solutions. If these are not available, they will have to accept injections of public capital or support from the EFSF, or be restructured or closed."

The IMF urged Republicans and Democrats in Washington to settle their differences: "Deep political differences leave the course of US policy highly uncertain. There is a serious risk that hasty fiscal cutbacks will further weaken the outlook without providing the long-term reforms required to reduce debt to more sustainable levels."

Now comes news that the government of tiny, mountainous Slovenia has collapsed. This could be bad for hopes to make changes to the EFSF quickly.

The 17 euro-zone countries agreed in July that they’d beef up the European Financial Stability Facility by increasing its size and broadening its powers.

How can the EFSF be changed? Only with unanimous consent of the countries. That could be hard–but not impossible–to do without a government in Slovenia.

The EFSF is a private-law company, governed by articles of incorporation and a “framework agreement.” It doesn’t make decisions in the normal framework of EU law. It’s just a company controlled by its shareholders, who are the euro-zone countries (16, since Estonia isn’t yet part). Each country appoints one director to the EFSF board.

The articles of incorporation require that directors give unanimous approval to bailout loans–and to any changes to the articles of incorporation.

The guarantee amounts contributed by each country determine the size of the EFSF. Those are detailed in the framework agreement. The framework agreement also requires unanimous consent of the countries to be modified. [See article 10.5(c)]

So all the countries have set about ratifying the changes. Most have to do it through their parliaments. And the amended framework agreement only comes into force when everyone has agreed. Here’s the relevant section (3.1):

The Parties agree that the amendments to the Framework Agreement shall enter into force and become binding between EFSF and the Parties on the date (the “Effective Date of the Amendments“) all of the Parties have provided written confirmation to EFSF substantially in the form of Annex 3 that they have concluded all procedures necessary under their national laws to ensure that their obligations under this Amendment shall come into full force and effect (an “Amendment Confirmation“).

So we wait for Slovenia.

Could the other countries go ahead without Slovenia? Sure. The EFSF is just a purpose-built private-law company. The other euro-zone countries could make a new one. Call it the Mini European Financial Stability Facility, or MEFSF, and let it be identical to the EFSF except with one fewer member. We’re sure Slovenia wouldn’t mind. But that would take time–a new agreement would need to be re-drafted and re-voted.

And who knows who else might want out too.

There’s a procedure under EU law called “enhanced cooperation,” which means that when all the countries can’t agree to cooperate, a subset comprising those who can can go ahead alone. That might be a guiding principle for a MEFSF. But it’s not really necessary: the MEFSF would be a private company. Any subset of countries could choose to take part, or not.

Having suffered painful, self-imposed economic reforms, Slovakia doesn't see why it should help bail out euro-zone partners like Greece. Prime Minister Iveta Radicova is trying to talk her country into solidarity, but has become increasingly isolated in her position.

Last Wednesday Slovak teachers took to the street, more than 8,000 of them striding along the asphalt of Bratislava's old city center. There they voiced anger about poor pay and dilapidated schools. "We've been tightening our belts for decades," shouted one speaker, "and our trousers are still falling down." On Thursday the doctors' union reported that 1,500 doctors out of a total 6,500 working in state-run hospitals want to resign in protest of unsatisfactory pay and poorly equipped facilities.

The government under the Prime Minister Iveta Radicova has turned the population against itself. Despite an impressive economic record, the country is still Europe's second poorest and in some regions one in three people are unemployed. The government leader has adopted a tough cost-cutting plan and can hardly dare asking for more from her people. But that's exactly what she must do: Slovakia is obligated to contribute some €7.7 billion ($10.9 billion) to the euro-rescue fund. It's a hefty sum for the formerly communist country with a mere 5.4 million inhabitants. At the moment it is highly unlikely that Radicova can rally a parliamentary majority to support the plan.

In Brussels the Slovaks are already notorious for their lack of solidarity. A year ago the prime minister and subsequently the parliament rejected calls to provide any financial help for Greece . Slovakia has put up with painful reforms "without being given a cent," the prime minister argued back then.

'A Direct Path to Socialism'But there is more at stake in autumn 2011. If Slovak parliamentarians vote against the new EFSF then the plan to support highly indebted nations will collapse. That scenario could lead to the demise of the common currency and no one knows for sure which countries could be brought down along with Greece.

For this reason Radicova has spoken out in favor of the rescue package -- but she is virtually alone in this. Leading the chorus of opposition to the EFSF fund is her coalition partner, Richard Sulik of the Freedom and Solidarity (SaS) party, whose votes she relies on. The rescue payments would lead the country "on a direct path towards socialism," he has warned, "we have to let Greece go bankrupt."

Sulik, who is also speaker of parliament, does not approve of state actors or the EU getting mixed up in the economy. He himself owes his business success to the fact that Slovakia has fewer market regulations than most European countries. The self-made man, whose risk-taking entrepreneurial spirit made him a millionaire, has become an icon of success in Slovakia two decades after the end of communism.

Liberal to the CoreSulik laid the foundations for his financial success with a chain of copy shops in the early 1990s. But it was only in 1998 that Slovakia's transformation really picked up momentum. As a member of a young radical troop around the Finance Minister Ivan Miklos, Sulik helped to turn Slovakia into a particularly liberal European nation.

At the heart of the reforms was the "flat tax" policy which applied to business people as well as private individuals. In Slovakia everyone pays 19 percent tax, a low rate which had the economic impact of a stimulus package. Investors flocked to the country, which had been largely unknown until then.

These days Samsung builds televisions at the base of the Tatra mountains, VW makes its Touareg there, Porsche builds Cayennes and Audi manufactures the Q7. The Korean car maker Kia invests in Zilina and Peugeot works in Trnava. In 2007 the economy grew by more than 10 percent. In January 2009 it joined the euro zone. Slovakia earns about a quarter of its economic performance from the automobile industry, which also means that the global economic crisis is keenly felt along the Danube. In 2009 gross domestic product (GDP) shrank by almost five percent.

'They Should Manage on their Own Too'But the government in Bratislava did not allow itself to be swayed from its liberal track: Instead of borrowing money for stimulus packages or raising taxes it chose to levy a strict savings programme on its population. It cut money for schools, hospitals and streets. In 2013 it should, once again, fulfil the Maastricht criteria. In the first quarter of 2011, the economy grew by about four percent.

Because Slovakia has now been forced to free itself from economic misery for the second time, many Slovaks are not willing to pay for Greek debt. To them, Greece was always on the other side of the Iron Curtain and from a Slovak perspective that means they were in a region of immeasurable wealth.

"Slovakia is dominated by a kind of head-of-the-class mentality," said one German manager in Bratislava. "The message is: We pulled through thanks to our hard work and hardship -- and, above all, without help. Now the others should manage on their own too."

Slovenia’s government lost a confidence vote, plunging the first former communist euro-region member into turmoil that may delay the approval of the European Union’s rescue fund amid a sovereign-debt crisis.

Lawmakers in Ljubljana voted 51-36 today to topple Prime Minister Borut Pahor’s administration, according to parliament’s press service. General elections are likely to be held as early as December, which may force a postponement of a vote to back the legislation enhancing the EU rescue fund, known as the European Financial Stability Facility. "An eventual delay in Slovenia would slow the whole ratification process, since Slovakia, where one of the ruling parties opposes a more powerful EFSF, has already made it clear that it wants to be the last eurozone member to vote on the issue," Michal Dybula, an economist at BNP Paribas in Warsaw, wrote in a note to clients today.

Slovenia, along with other newer EU nations such as Slovakia, are showing little empathy for countries that aren’t showing the fiscal discipline they were forced to endure as part of becoming members in 2004. Slovak Premier Iveta Radicova has proposed linking a vote on the euro bailout facility with a confidence motion on the Cabinet to boost the chances the legislation will pass and deal with the continent’s debt crisis, Finance Minister Ivan Miklos said today.

DiscontentThe head of Freedom and Solidarity, one of the four ruling Slovak parties, says party lawmakers will reject the overhaul of the bailout fund. Radicova needs the party’s votes to push through the overhaul of the EFSF, the temporary bailout fund designed by EU leaders. A failure to approve the package in Slovakia, the euro-area’s second-poorest member, may delay euro- area approval of the plan to prevent the sovereign debt crisis from engulfing countries such as Spain and Italy.

Slovenia’s economy is losing momentum with export demand in Europe weakening. Gross domestic product expanded 0.9 percent in the second quarter on the year from 2.3 percent in the previous three-month period. The economy is now forecast to expand 1.5 percent this year after a previous estimate of 1.8 percent, according to Finance Minister Franc Krizanic.

Pahor’s administration took power at the end of 2008 as the global financial crisis started to take its toll on the world economy. Slovenia’s export-dependent economy was among the hardest hit in the 2009 recession and the government has struggled ever since to put economic growth on a more solid footing.

Failure"Key reforms have failed to materialize under this government, including the pension changes and labor-market overhaul," Radivoj Pregelj, an analyst at Nova Gorica-based Abanka Vipa d.d., said in a phone interview. "The next administration should be more stable and sound even though much- needed reforms in Slovenia are difficult to implement."

The extra yield investors demand to hold Slovenia’s bonds maturing in 2021 rather than similar-maturity German debt more than doubled since the pension changes were rejected in June. The difference rose to 305 basis points, or 3.05 percentage points, in Ljubljana at 3:47 p.m. from 147 basis points on June 6, according to Bloomberg data.

Political uncertainty pushed the SBITOP, Slovenia’s benchmark index of six most-traded stocks, to slide for a third consecutive session. The index declined 0.2 percent to 609.90 points at 3:47 p.m. in Ljubljana.

Early ElectionsEarly elections in Slovenia are not a straightforward matter. In the case of a no-confidence vote, lawmakers have a period of 30 days to propose another possible leader who may assemble a majority in the legislature. If that person fails, the president dissolves the parliament. "The probability of a new interim leader emerging is very slim and the early vote option is the most likely outcome," Ali Zerdin, a political analyst and editor at Delo newspaper in Ljubljana, said in an e-mail.

Janez Jansa, a former premier and the leader of Slovenia’s Democratic Party, is likely to emerge as the winner of an early vote, according to a survey by Episcenter polling agency. Jansa’s group would win 27 percent of the vote compared with 15 percent for Pahor’s Social Democrats, according to the Sept. 3 survey of 802 people and published by Finance newspaper. No margin of error was given.

Jansa recently warned of "‘uncontrolled increase" of debt by the current administration and on May 7 said on his party’s website that financial assistance to Greece from countries such as Slovenia "isn’t fair" because Greek workers have higher salaries. "The ruling coalition is thus creating a fiscally dramatic situation for the next government, which will have to set aside 10 percent of the budget a year just for interest payment," Jansa wrote on his Facebook page on Sept. 19. His office confirmed the posting to Bloomberg News.

In 2008, Slovenia was allocating 2 percent of the budget for interest payments, according to Jansa.

Even though the recession officially ended more than two years ago, the still-weak U.S. economy and a pullback in federal support means the outlook for states and local governments remains negative, Moody's Investors Service said on Monday.

The two sectors of the $3.7 trillion U.S. municipal bond market were originally branded with negative outlooks by Moody's in 2009 as tax revenue tanked. The rating agency noted that revenue collections have improved, but not enough for states to completely replace federal stimulus funding that ended in June. Another reduction is expected as Congress wrestles with ways to reduce the U.S. deficit.

"The determination of both political parties to reduce project federal budget deficits is certain to result in reduced funding for federal programs run by the states," Moody's said in a report. States also face pressures from Medicaid, the healthcare program for the poor, and big unfunded employee pension liabilities. In addition, there is the prospect of potentially having to bail out fiscally troubled local governments, Moody's said, pointing to situations in states such as Alabama, Michigan, Pennsylvania and Rhode Island where bankruptcy has been eyed by cities or counties.

Still, states have the flexibility to deal with financial strain and support their ratings, Moody's said, adding the median state rating was Aa1. For local governments, the real estate market remains a problem as property tax collections fell for two consecutive quarters, including a 1.6 percent dip in the first quarter of 2011. Moody's said that trend is likely to continue into fiscal 2012 "as assessed value declines outpace rate increases."

Meanwhile, the budgets of cities, counties and other local governments are bound to be hit with reductions in state aid as states in turn deal with lower federal funding, according to Moody's. "Given the numerous challenges facing the local government sector, we believe that rating downgrades will continue to outpace upgrades until we begin to see meaningful economic growth and recovery of property values," the rating agency said. It added, however, that bond defaults and Chapter 9 bankruptcy filings are expected to remain rare.

After school and on weekends, Carlos Leandro Peixoto de Abril sells ice cream made by his grandmother from a stoop alongside the family's cinder-block home. Instead of Brazilian reais, though, the 11-year-old prefers payment in capivaris—a local currency emblazoned with the face of a giant rodent. Bills in hand, Carlos then heads to a local grocer and buys ingredients, at a special discount, for another batch of grandma's goods.

The capivari circulates only in this dusty, agricultural town 60 miles north of Rio de Janeiro. The money is an effort by the town, one of the poorest in southeastern Brazil, to encourage its 23,000 residents to spend locally.

Ten months after introduction of the capivari—named after the capybara, a pig-sized rodent common in a local river—the currency is lifting fortunes of local retailers and gnawing holes in the pockets of consumers. Capivaris pay for everything from haircuts to restaurant tabs to tithing at churches. The mayor even has plans to open a "Capivari Megastore," where local artisans and growers can showcase wares.

The capivari is one of 63 local moneys—including bills named after the sun, cactus and the Brazil nut—now circulating in needy neighborhoods throughout Latin America's biggest economy. The idea is gaining currency as towns seek a share of current economic growth. This month, a new local currency hit the streets in Cidade de Deus, the Rio slum that was the subject of a blockbuster film and a stop on President Barack Obama's South American tour this year.

While equal in value to the real, local currencies gain traction because local merchants offer discounts when using them. No one is forced to quit the real, but shopkeepers say greater volumes make the markdown worthwhile. "It brings customers through the door," said Roseanne Augusto, manager of a Silva Jardim hardware store, where a builder one recent afternoon set aside 2,700 reais in supplies, about $1,520 worth. He then left the store, went to trade reais, and returned to pay with capivaris, saving 5%.

Capivaris are managed by a new, community-run Capivari Bank. Inside its one office, a brightly painted space the size of a small fast-food joint, are the bank's employees, three women in their 20s. For each of the 50,000 capivaris first circulated, Capivari Bank holds an equal number of reais on deposit at a traditional bank. Tatiana da Costa Pereira, the bank manager, says she sees as many as 60 clients a day. A local police car patrols outside and a state policeman comes in regularly.

The currency has been so successful the town ordered a second run of the notes, which bear serial numbers, watermarks and a hologram alongside the whiskered varmint. Celma de Almeida, a garment saleswoman, says she didn't like the capivari at first. "I thought it was hideous," she says. "But it's grown on me. Now it's reais that seem ugly."

The first local money in Brazil was the palma, or palm, which helped foster a local economy in Conjunto Palmeiras, outside Fortaleza in Brazil's northeast. The idea was hatched by Joaquim Melo, a former seminarian who worked as a social activist there in the 1990s. He saw a currency as a logical alternative to an experiment with neighborhood credit cards, which proved too bureaucratic for local merchants. "They liked the idea of cash, even if it was a different sort of cash," says Mr. Melo. A group of four small retailers that accepted the palma quickly grew to more than 200.

At first, Brazilian authorities frowned on the idea. In 1998, just as Banco Palmas was getting under way, police with machine guns raided its tiny office, acting on a complaint from Brazil's central bank. The palmas hadn't yet been printed, but police seized a handwritten ledger and 100 reais. Mr. Melo convinced the government the notes weren't a threat to the real. Because the palma was pegged to the sovereign currency, he argued, it was as legitimate as a coupon or other proxy for legal tender.

The project drew interest from other poor communities. By 2005, the federal government came on board, getting Mr. Melo to help launch community banks across Brazil. Silva Jardim's mayor, Marcello Zelão, wanted residents to spend in their own community. Because so many residents work in richer towns, he says local retailers often lost out to competitors at the other end of daily commutes. "It was like even our newsstands were inferior," he says. "Like the same newspapers had better news if bought in another town."

With Mr. Melo's help, the mayor organized town hall meetings and made the pitch. Locals voted on a name and hired a local designer to draw up the bills. In November, with seed money from town coffers, capivaris rolled off the press—in denominations no greater than ten. "Big notes get hoarded," says Mr. Zelão. "Small bills circulate." Locals use the capivari everywhere. Rogério Simplício Costa, priest at the town's hilltop Catholic church, says parishioners put about 30 capivaris in the collection box during a recent Sunday mass.

Nelcimar Fonseca, manager of a supermarket, says as much as 12% of sales have been in capivaris. Margareth Vieira Xavier, owner of a roofing shop, pays part of her workers' salaries in capivaris. "They didn't like it at first," she says, "but then they realized it saves money on groceries."

In Cidade de Deus, where the new local currency is called the CDD, people are just getting used to the idea. "I've seen a lot of money come and go," says Benta Neves do Nascimento, a 78-year-old resident who remembers failed currencies during Brazil's turbulent economic past.

Her qualm with the CDD has little to do with economics, though. "I don't like the way it looks," she says. That's surprising: The likeness on the 5 CDD note is of her, a tribute to her longstanding role as a community activist and spirit healer. "If the money outlasts me, people will think I was ugly."

The assumption that global population will peak around 9-10 billion may be overly optimistic — and if it is, population will continue to rise, placing enormous strains on the environment

In a mere half-century, the number of people on the planet has soared from 3 billion to 7 billion, placing us squarely in the midst of the most rapid expansion of world population in our 50,000-year history — and placing ever-growing pressure on the Earth and its resources.

But that is the past. What of the future? Leading demographers, including those at the United Nations and the U.S. Census Bureau, are projecting that world population will peak at 9.5 billion to 10 billion later this century and then gradually decline as poorer countries develop. But what if those projections are too optimistic? What if population continues to soar, as it has in recent decades, and the world becomes home to 12 billion or even 16 billion people by 2100, as a high-end UN estimate has projected?

Such an outcome would clearly have enormous social and environmental implications, including placing enormous stress on the world's food and water resources, spurring further loss of wild lands and biodiversity, and hastening the degradation of the natural systems that support life on Earth.

It is customary in the popular media and in many journal articles to cite a projected population figure as if it were a given, a figure so certain that it could virtually be used for long-range planning purposes. But we must carefully examine the assumptions behind such projections. And forecasts that population is going to level off or decline this century have been based on the assumption that the developing world will necessarily follow the path of the industrialized world. That is far from a sure bet.

Eyeing the future, conservationists have clung to the notion that population will peak and then start to decline later this century. Renowned evolutionary biologist Edward O. Wilson has propounded what he terms the bottleneck theory: that maximum pressure on the natural world will occur this century as human population peaks, after which a declining human population will supposedly ease that pressure. The goal of conservation is therefore to help as much of nature as possible squeeze through this population bottleneck. But what if there is no bottleneck, but rather a long tunnel where the human species continues to multiply?

Population projections most often use a pattern of demographic change called the demographic transition. This model is based on the way in which high birth and death rates changed over the centuries in Europe, declining to the low birth and death rates of today. Thus, projections assume that the European experience will be replicated in developing countries. These projections take for granted three key things about fertility in developing countries. First, that it will continue to decline where it has begun to decline, and will begin to decline where it has not. Second, that the decline will be smooth and uninterrupted. And, finally, that it will decline to two children or less per woman.

These are levels now found in Europe and North America. But will such low levels find favor in the Nigerias, Pakistans, and Zambias of this world? The desire for more than two children — often many more than two — will remain an obstacle and will challenge assumptions that world population will level off or decline.

In quite a few developing countries, birth rates are declining significantly. But in others they are not. In Jordan, for example, the fertility rate still hovers around 4 children per woman. Indonesia was a country that was widely acknowledged for its innovative and steadfastly pursued family planning program in the 1980s, when its total fertility rate fell to 3 children per woman. It has been hovering for some time around 2.5. In a recent survey, about 30 percent of women with 2 living children said that they wanted another child. That figure was 35 percent for their husbands.

Sub-Saharan Africa (SSA) is the region that now causes the most worry. It remains in a virtual pre-industrial condition, demographically speaking, with high fertility and rather high mortality. The UN projects that fertility will decline from a high level of 6 children per woman around 1990 and reach about 3 children per woman by 2050. Many sub-Saharan African countries have seen some decline, and today the average fertility rate is 5.2 children per woman. Should the UN's assumptions prove correct, sub-Saharan Africa's population would still rise from 880 million today to 2 billion in 2050.

Countries such as Congo, Kenya, Madagascar, and Rwanda have identified rapid population growth as a problem and committed sufficient resources to address it. Yet their fertility rates remain at 4.6 to 4.7 children per woman, and a future halt in fertility decline in those countries would surprise no one. But most future population projections assume a continuing decline.

Often fertility rates might decline from a higher level and then "stall" for a time, not continuing their downward trajectories to the two-child family, resulting in a higher-than-projected population. In sub-Saharan Africa, this has happened in Nigeria, where the fertility rate has stalled at about 5.7, and in Ghana, where the fertility rate is 4.1 and apparently resuming a slow decline. Very recent surveys have shown that fertility decline in Senegal has likely stalled at 5.0 children and has risen somewhat to 4.1 in Zimbabwe. Clearly, not all countries will see a continuous decline in fertility rates, and some have barely begun to drop, meaning that projected population sizes will turn out to be too low.

Fertility rates are lowest among educated, urban women who account for much of the initial decrease. What will it take to reach large, often inaccessible rural populations, whose desire to limit family size is frequently quite limited and whose "ideal" number of children is quite high? Challenges include: the logistical task of providing reproductive health services to women; informing them of their ability to limit their number of children and to space births over at least two years; low levels of literacy; the value husbands place on large families; and securing funding for family planning programs.

India provides another cautionary tale. The country is often hailed as an emerging economic power, yet 930 million people — three-quarters of India's population — live on less than $2 per day. Some advanced Indian states, such as Kerala and Tamil Nadu, have excellent family planning programs and fertility rates of 1.8 children per woman, which will lead to declining populations in those states.

But some of India's poorest and most populous states — Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh — have total fertility rates ranging from 3.3 to 3.9. The Indian example illustrates an important trend: that the challenge of soaring populations will increasingly be concentrated in the poorest countries, and in the poorest regions of nations such as India.

The real possibility of fertility decline stopping before the two-children level is reached requires demographers, policy makers, and environmentalists to seriously consider that population growth in the coming century will come in at the high end of demographic projections. The UN's middle-of-the-road assumption for sub-Saharan Africa — that fertility rates will drop to 3.0 and population reach 2 billion by 2050 — seem unrealistically low to me.

More likely is the UN's high-end projection that sub-Saharan Africa's population will climb to 2.2 billion by 2050 and then continue to 4.8 billion by 2100. The dire consequences of such an increase are difficult to ponder. If sub-Saharan Africa is having trouble feeding and providing water to 880 million people today, what will the region be like in 90 years if the population increases five-fold — particularly if, as projected, temperatures rise by 2 to 3 degrees C, worsening droughts?

Many factors may arise to cause fertility rates to drop in countries where the decline has lagged. A rising age at marriage, perhaps resulting from increased education of females and from their increased autonomy; rising expectations among parents that their children can have a better life; decreasing availability of land, forcing migration to cities to seek some source of income; real commitment from governments to provide family planning services and the funds to do so. The list goes on.

But we must face facts. The assumption that all developing countries will see their birth rates decline to the low levels now prevalent in Europe is very far from certain. We can also expect the large majority of population growth to be in countries and areas with the highest poverty and lowest levels of education. Today, the challenge to improve living conditions is often not being met, even as the numbers in need continue to grow.

As populations continue to rise rapidly in these areas, the ability to supply clean water for drinking and sustainable water for agriculture, to provide the most basic health services, and to avoid deforestation and profound environmental consequences, lies in the balance.

The first time he despaired of his debts, Vaggelis Petrakis drank a poisonous brew of beer and gasoline. A note he left didn't mention the financial woes of his fruit and vegetable business, of which his family was well aware. Instead, he left instructions for his children on how to look after his animals. "Put mother rabbit in a different place from the little rabbits," the note began.

Then he had second thoughts and called his son, Stelios, who took him to a hospital. Mr. Petrakis survived that suicide attempt. But Greece's collapsing economy and the ruin of his business would soon push him to a more determined effort. "It was shame, fear, pride, dignity," says his son. "Whoever you ask, they will say he was a man of dignity."

Two years into Greece's debt crisis, its citizens are reeling from austerity measures imposed to prevent a government debt default that could cause havoc throughout Europe. The economic pain is the price Greece and Europe are paying to defend the euro, the centerpiece of 60 years of efforts to unite the Continent. But as Greece's economy shrinks, its society is fraying, raising questions about how long Greeks will be able to take the strain.

Gross domestic product in the second quarter was down more than 7% from a year before, amid government spending cuts and tax increases that, combined, will add up to about 20% of GDP. Unemployment is over 16%. Crime, homelessness, emigration and personal bankruptcies are on the rise. The most dramatic sign of Greece's pain, however, is a surge in suicides.

Recorded suicides have roughly doubled since before the crisis to about six per 100,000 residents annually, according to the Greek health ministry and a charitable organization called Klimaka. About 40% more Greeks killed themselves in the first five months of this year than in the same period last year, the health ministry says. Others have attempted suicide. On Friday, Greek police said, a man in his 50s struggling with his debts was hospitalized after setting himself on fire outside a bank branch in the northern city of Thessaloniki.

Suicide has also risen in much of the rest of Europe since the financial crisis began, according to a recent study published in the British medical journal The Lancet, which said Greece is among the hardest hit. While some countries have higher rates of recorded suicides, including the U.S.'s over 10 per 100,000, mental-health professionals here say Greece's data greatly understate the incidence of suicide because it carries a strong stigma among Greeks. The Greek Orthodox Church forbids funeral services for suicides unless the deceased was mentally ill. Families often mask suicide deaths as accidents.

A suicide help line at Klimaka, the charitable group, used to get four to 10 calls a day, but "now there are days when we have up to 100," says a psychologist there, Aris Violatzis. The caller often fits a certain profile: male, age 35 to 60 and financially ruined. "He has also lost his core identity as a husband and provider, and he cannot be a man any more according to our cultural standards," Mr. Violatzis says.

Heraklion, commercial center of the island of Crete, has had a spate of such deaths. Mr. Petrakis, the fruit and vegetable dealer, was just one of three recent suicides at a single wholesale food market on the edge of the city. Victims once were typically adolescent males or old people facing severe illness, and in normal times suicide cases often involve a mixture of factors including mental illness, says local psychiatrist Eva Maria Tsapaki.

But the economic crash has created a "new phenomenon of entrepreneurs with no prior history of mental illness who are found dead every other week," she says. "It's very unusual." Part of the explanation, some locals believe, lies in the nexus of a burst credit bubble and the Cretan male identity. They say the island's history of rebellion against foreign occupiers, from Ottomans to Nazis, has entrenched a cultural ideal of male strength and pride.

"Our pride is as high as Psiloritis," the island's tallest mountain, says Yiannis Tsevabinas, a local lawyer. The culture breeds confident, extroverted and adventurous characters, he says, "but when pride is lost, it can also make you vulnerable."

For Mr. Petrakis, a burly, mustachioed man of few words, a local custom of free-flowing, often informal lending kept his business afloat for years. But after Athens in late 2009 disclosed a budget deficit far worse than previously reported, touching off the Greek debt crisis, he found himself squeezed between banks that would no longer lend and customers that could no longer pay.

Mr. Petrakis grew up in a poor olive-growing community in the mountains of Crete. As a small boy, he walked from village to village selling loukoumi sweets, similar to Turkish delight, from a homemade wooden box. "He always kept the last and best piece for me," says Georgia Petrakis, who was growing up in the same rural district. "We were in love since we were children."

When she was 18, they married and moved to town. Mr. Petrakis worked day and night selling livestock feed from a truck, and would fall asleep exhausted while cradling their infant son. He found a job working at the wholesale food market and began to save to buy his own store.

Finally, in 2000, when he was 47, he managed to combine his savings with a bank loan and launch his own wholesale food business. "We felt we had almost made it," Mrs. Petrakis says. Life was getting better. Greece adopted the euro. The economy thrived. The family sold produce to hotels and supermarkets. Mr. Petrakis bought some land in the mountains, where he kept animals and liked to relax. But the hotels and supermarket chains often paid late. They gave small suppliers such as Mr. Petrakis postdated checks that couldn't be cashed until months later.

This practice had long existed in Greece, but it exploded when it became a credit-driven economy in the 1990s, says Constantine Michalos, president of the Athens Chamber of Commerce and Industry. Small businesses had little choice but to accept payment this way. In doing so, they were in effect acting as banks, lending to their own customers for several months for no interest. "This was a para-banking system of enormous size. It is one of the main reasons for the crisis," Mr. Michalos says.

Small businesses struggled with cash shortages because they had to pay their overhead when due, but wait months for hard cash from customers. Mr. Petrakis managed the same way other small entrepreneurs did: To get money quickly, he took his customers' postdated checks to banks and sold them at a discount. If he had a check for €1,000 that couldn't be cashed for five months, a bank would give him €800 right away, then another €100 on the date the check became cashable, his lawyer, Aggelos Zervos, says. The bank would keep the remaining €100. Though this gave Mr. Petrakis the cash he needed, it ate into his revenue and margins. "Without realizing, we were slowly going bust," Mrs. Petrakis says.

Then, after Greece's debt bubble burst, these postdated checks started bouncing frequently, including checks written by Mr. Petrakis's customers. Some were longstanding friends. One was a relative who owned a supermarket. When Mr. Petrakis asked the customers to pay up after their checks bounced, they refused or made him wait longer, often bluntly telling him it was his problem, Mrs. Petrakis says. "People he thought were friends changed their behavior," she says. Her husband had always been "very correct," and was dismayed by constantly finding himself arguing with old business partners. "He became more and more withdrawn."

Through the years, Mr. Petrakis had taken out extra bank loans, bringing his total bank debt to around €600,000, or about $850,000. Now he began falling behind on loan payments. Banks were threatening the family with forced sales of their assets, including their home. In desperation, Mr. Petrakis turned to a harebrained scam. In spring 2010, he obtained a fake postdated check in the name of an Athens company with which he had no dealings. He tried to sell it to a bank at a discount in the usual way.

Mr. Petrakis knew the check would bounce when it matured in the fall, and the bank would come to him wanting its money back, but he hoped by then to have money to repay the bank, says his lawyer, Aggelos Zervos. "He knew this was not right. All he could gain this way was time," the lawyer says. The bank spotted the fake and called the police, who arrested Mr. Petrakis and searched his house. There they found his father's old World War II rifle, a common memento here, and charged him with possession of an unlicensed gun as well as financial fraud.

"Vaggelis was so ashamed, he couldn't look me in the eye," his lawyer says. He was freed pending trial. A local newspaper wrote about a "check forger." Mr. Petrakis wasn't named, but "word got around," Mrs. Petrakis says. "We felt ostracized." It was in July of last year that her husband first tried to take his own life by swallowing gasoline. In the hospital, his wife told him, "I don't want you to do this ever again." He promised not to. "We've been through so much, we're going to make it," she told him while lying in bed at night. He agreed.

On his first day back at the fruit and vegetable market, however, he got into a loud argument over money with an orange grower. The man called him a "crook," says a fellow grocery wholesaler who came to his defense. "For Vaggelis to be called a crook here at the market was a big offense. I would have killed the guy," the fellow wholesaler says.

Mr. Petrakis turned pale, took his car keys and drove off. His wife ran behind the car, screaming for him to stay. His family searched for him throughout the day and night. Mr. Petrakis collected his hunting rifle from home and wrote farewell notes over four pages of an old calendar. The banks had destroyed him, he wrote, and he had lost his honor over the check affair. He warned that others on Crete would suffer his fate.

"Please forgive me," he wrote. "I love you very much." At 5 a.m., Mrs. Petrakis heard her husband's dog whimpering in an olive grove by the field where he kept his animals and used to go for peace of mind. In the dark, she tripped over him beneath an olive tree. He was still alive but, with a gunshot wound in his head, could no longer speak. He died in her arms.

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Yeah, saw that. I guess the question is whether the Obama administration / Fed (Bernanke) are willing to take the heat anyway. If so, I imagine they're underestimating just how bad of a blow it will be to what little credibility they have left. Ilargi is spot on in the lead today, though. No matter what measures and wordplay Bernanke spouts off later, it won't do a thing to address global issues of solvency, even over the next few months.

(from last thread)

Greece's Finance Minister, aka the physical manifestation of material excess, aka the other "chubby flubby" bastard, has unsurprisingly agreed to bring forward and ramp up austerity measures on the Greek people in an attempt to get a few more billion in aid next month, which hasn't been authorized yet, in order to stay afloat for another month or so.

"A Finance Ministry official said Venizelos had agreed to bring forward measures from the so-called "mid-term plan," in which it has committed to slash its budget deficit through 2014 and sell some 50 billion euros in state assets.

Greek media reported the measures were likely to include accelerated sackings of state workers, pension and wage cuts for civil servants, increases in heating fuel tax and extension of a one-off property tax announced.

The government has so far said it will immediately put up to 3,000 public employees into a so-called labor reserve, in which they draw 60 percent of salary for a year while looking for another state job. Another 20,000 would follow in a second wave."

Some Americans believe we can collectively triumph over the monolith we presently fear and worship. Others believe the best we can do is to find the personal strength to endure and go forward on lonely inner plains of the self.

Doing either will take inner moral, spiritual and intellectual liberation. It all depends on where you choose to fight your battle. Or if you even choose to fight it. But one thing is certain. The only way out is in.

There are two economic camps who are battling. We need more comments and analysis and clarification on the following points. (Some people still do not get the explanations)

Why are banks fighting for less capitalization?Why are banks wanting more liquidity?Why will more leveraging help the banking economy?How does cash flow fit into all of this?How does GDP GROWTH or no growth fit in?---The protest poster that said,___________| America || 99% poor|| 01% rich |____________said it all

Anyone know of anyone who lost their FDIC insured boodle from any of those banks?

If the SHTF hard enough to put FDIC out of commission I can't see that there will be any trees left standing in the forest to shelter behind, other than the trees in the windbreak of a homestead in the boonies.

More to the point, after one has a couple of months in cash, what is the advantage of holding any more in outside a bank where it may be transferred to brokerages or made into certified checks to purchase hard items like gold or that Mercedes Benz that you said you would only buy if you knew the end of the world was coming.

If Ben finally started dropping money from helicopters as he suggested once upon a time, I think he might actually manage to turn things around. Money from helicopters gets the $ into the hands of those who would spend it. It also should generate a little inflation which would help out the present debt imbalance. Why not? (other than the pressure from the wealthy that like things the way it is...)

All of this to rollover debt for a few more weeks or months and keep the financial elites in the lifestyle they've grown accustomed to. But remember what Jimi said -"And so castles made of sand, melts into the sea, eventually..."

Bloomberg also reported earlier today that Lloyd's of London (insurance company) was pulling desposited cash from banks in the Euro periphery, or at least that it "stopped depositing cash" with those banks. Unless the Fed decides to start buying up Euro bonds in 20 minutes, I suspect we will see similar moves by other large companies over the next few weeks, in banks of both the European periphery and core.

Interesting. Few make the wealth-debt connection, including the bankers and economists. Less debt = less wealth.

What this means is that there is no real way for the Greeks to exit the euro (oh, they will in 'official' form) and no painless way to get rid of debt.

Greece off euro: Greeks need hard currency to buy imported fuel (as do the rest of the PIIGS). What currency? Drumroll, please: Euros!

Where will euros be had? In black markets as always. Greece and Europe will be flooded with highest quality heroin, terrorists, military arms, prostitutes, African immigrants bearing gifts. Paybacks are hell, Mr Germany!

Greece will issue drachmas and devalue ... and devalue and devalus some more as people/companies buy euros on the street so as to obtain fuel. Wealth = debt: no devaluation means no fuel (conservation by other means), yet devaluation also means scorchingly expensive fuel as the price inflates in real terms to $50 a gallon or so for gasoline.

Conservation by other means. See, children? Ours is an energy crisis, not a finance crisis per se

After a period of hyperinflation and economic collapse (that will also infect the Eurozone) Greece will issue a 'New Drachma!' That replacement will hyperinflate for the same reason: a need for a hard currency to buy imported fuel. Same result: real price $50/gallon gas. At that point (or after another cycle or two of inflationary misery) the drachma will be jettisoned and Greece will accept ... (drumroll) the euro.

Greece may also dollarize, if the Germans decide to ring-fence itself. Even so, no country can escape the euro if it exists in any of them as a 'preferred currency'. The arbitrage trade is too profitable the same time gas is ridiculously underpriced at anything less than ... (drumroll) $50 per gallon of gas.

At $50 per gallon you can count on your fingers how many more years the European auto industry/airlines/aerospace will last.

Remember, hyperinflation is always an arb trade between a currency you want or need (dollars, euros, pound sterling) and the currency the boss man gives you (Weimar papiermarks, drachma, yuan).

Recap: the euro will endure like a case of rheumatoid arthritis, and gas will cost enough to give motorists hemorrhoids.

My suggestion to the Greek voters is that they set the current level of pension rates and government employee salaries to Finance Minister Venizelos current weight, and then reset the rates on a directly proportional basis to his weight change. He could be weighed, buck naked, on national television biweekly. A far more entertaining national event than the Benny show. Perhaps the television media could advertise, sending the proceeds directly to the EU private banks without passing go. That would indicate patriotism on the part of Venizelos. Austerity starts at the top.

$400B of notes for $400B of long bonds = no money printing = no devaluation of dollar. Same thing with reinvestment into MBS. No cut of IOER. Not what any "risk" markets wanted, including gold. Throw it back to Europe.

Good analysis. There is certainly no separating financial capital flows from energy flows in the final analysis. A greek currency separated from the Euro will hyperinflate and black markets will develop for more valuable currencies and PMs to acquire necessities such as fuel. I still think that's what should and will happen. I'm curious, though, what exactly are the rules concerning RE-entry into EMU once one "voluntarily" decides to leave?

There is plenty of demand for bonds across the curve. The thing is, the Fed doesn't know what else to do but try and lower long-end rates further and act like they're doing something to stimulate housing (the economy). That latter part is really the key. It's all an act for the status quo elites, because there is absolutely nothing else it can do without destroying its credibility and/or the economy. Of course, no one is really buying it any more.

I just donated $10 to TAE in recognition of SuperSleuth Ash, who wrote:

bosuncookie,

Urinal cake?

Indeed, bosuncookie is slang for a urinal cake. Aboard naval vessels, bosuns are often in charge of the folks who clean the head, or they do it themselves. Other more technical ratings are sometimes disdainful of the bosun mate, often perceived as intellectually inferior, whose tasks encompass a much broader range of duties. (Boat operations, crane operator, cargo stower, deck swabber, painter, housekeeper...) Thus, the pejorative nature of "bosuncookie."

In another lifetime, I was a bosun mate. When choosing a screen name, I like the irony of honoring the rating of bosun while staying grounded in the reality of piss and shit.

You should read the Spiegel today. One title is:Narziss und Windhundwhich means "Narcissism and hot air" and is a play on "Narziss und Goldmund" (Hesse). The article is about… Berlusconi and how he is dragging the Eurozone down by not taking the necessary measures because he is to preoccupied with his court cases and private life.And every day, there are articles on polls indicating that 70 to 80% of the German population does not wish to bail out the Greeks.

So yes, many Europeans are tired of paying and the press is not helping in cultivating feelings of "trust and solidarity".

On another front, some scary news of local governments in France heading out to obtain loans on the international markets. Aïe, aïe. (In French)http://www.lemonde.fr/economie/article/2011/09/21/face-a-un-credit-rare-les-elus-locaux-vont-se-financer-sur-les-marches_1575262_3234.html

Concerning re-entry into the euro, the rules are as perfectly clear as they are for first exiting the euro, If you catch my drift…

The Fed just pulled the plug. The end of the hopium trade. Green shoots in the compost. Time to adjust your seat belts or duck and cover (for fellow geezers). Dollar headed for the moon on the forex. PM down for the moment. When the dollar reaches a certain point, then the USD carry trade will implode forcing the hedgies to buy dollars to get out of their malinvestments. This could send the dollar past Uranus.

Birth rates decline among populations when women gain access to education AND also contraception.

"I'd like to share a revelation that I've had during my time here. It came to me when I tried to classify your species and I realized that you're not actually mammals. Every mammal on this planet instinctively develops a natural equilibrium with the surrounding environment but you humans do not. You move to an area and you multiply and multiply until every natural resource is consumed and the only way you can survive is to spread to another area. There is another organism on this planet that follows the same pattern. Do you know what it is? A virus." -Agent Smith, The Matrix, 1999

Tyler Durden strangely silent as the QE 3 remains in port, all ropes securely fastened to the pier. He knows exactly what this means for his precious precious metals, at least in the short run. He is in a strange position by telling everyone to bet the farm that the Fed would do exactly what he was vilifying. And it chose not to. At least this month.

I figure that Benny has read Naomi Klein's The Shock Doctrine and decided that the sheeple are not sufficiently disoriented to proceed with the next step.

Excuse me but Agent Smith's screenwriter should go back to college. Every organism on the bleeding planet will expand its population until it no longer can. It's a primary dynamic behind all evolution. Species that do not do this die out quickly. As to his comment regarding viruses, they are not even true organisms, just rogue genes. Actually, humans may be the first organism to break this 3 billion year old rule because they have **potentially** enough intellect to countermand their instincts. The problem is that most men breed before they are forty and the big brain never can control the little brain under 40.

Do you have a link for that piece? I'm not seeing it on Spiegel. It sounds very interesting. I never read Hesse, but after reading JMG's latest article on "The Glass Bead Game", I imagine I'd really enjoy his novels.

Bruce Krasting thinks that the takeaway from today's Fed action is that the Fed has decided to assist with a great big refi by signaling it will buy more MBS. This is a creative way to put cash in regular people's hands without fueling up the helipcopter. Who says the Fed can't give money away to the folks?http://www.zerohedge.com/contributed/wh-and-fed-sleeping-together

The US bond market will collapse under the weight of spiraling interest rates and USD will hyperinflate soon, because, well... Congress can't stop spending money and giving it directly to the people, and... the Fed can't stop printing money and monetizing all debts, and... everyone has lost faith in the dollar, as gold prices keep going up forever, making it the only safe haven left, and... if the above is not at all true today, then don't worry, it will be true tomorrow, or the next day...

What is interesting in this regard is what language Ben will utter when a Greek default starts the EU downfall and the grand flight to safety into the USD and Treasuries. It'll demolish US exports, which will demolish jobs, which will drive down home prices, and so on and so forth.

I don't have a lot of respect for Bruce Krasting. Admittedly he is quick on the draw and can shot from the hip, but he only has four toes left :-)

Since Fanny and Freddy are underwriting something like 90% of US mortgages, if the Fed keeps putting their maturing mortgage debt into treasuries, they either implode or require an earlier new bail out from the treasury, meaning that Hank Paulson's bazooka will have to be dusted off. So Benny and the Inkjets decided to try to keep it at an equilibrium. If F&F don't get money from either the Fed or the Treasury, then the US mortgage market freezes up almost entirely. While I, frankly, think this would be a good thing, there are a lot of banksters who think otherwise. And they have more influence than moi. But this also definitely is not monetization.

Krasting writes, "I think that Treasury will announce the plans for a Mega Refi in the not too distant future. It could come this weekend or next week." Now that Johnny Carson is dead we have a new Karnak. Now if it were Bill Gross saying that, it definitely will **not** come out this weekend, but that would be a different story. But Gross never gave Krasting a duplicate key to the Fed's back door. And what does he base this on. Benny and Barry have a you scratch my back deal. And what does Benny need? He was reappointed to another 4 year term. By the time that is up, he will be lucky to escape the peasants and their pitchforks. I doubt he would want another one. And that one would come up in Barry's second term (?) anyway. Benny can just join Tony on the JPMC multimillion dollar pimp teat. Or perhaps the UBS teat with Phil Gramm. These TBTF can figure out their pension plans for themselves. They can form a sociopathic liars club. And look at what the Fed Chair, Volker, did to Jimmy the Peanut in 1980. Prime rate around 20%. OK. According to Ilargi he did not really force it - he just waved his magic wand while it happened. But in any event, it sunk Carter faster than the Ayatollah cutting a prisoner retention deal with Ed Meese. The main point I am making is that Fed Chair loyalty, to an incumbent TOTUS is not automatic, especially to a Democrat.

Barry will be taken care of. He carried the water for Wall Street better than Aquarius himself. He being a bankster puppet wolf wearing the sheepskin of a progressive (getting a little frayed by now), he will be able to carry on the class war against the poor and middle class in a way that W and Dickhead could only dream of, by neutralizing the left wing of the Democratic Party. And Barry serves one more function for Wall Street which barely nobody dares mention. When the coming collapse brings out the red hot anger and frustration of Americans, and this being America, this anger must have a major ethnic component, the anger will be diverted from ethnic groups more closely associated with Wall Street to the detriment of our darker brethren. We like to forget just how evil these guys are.

For some reason, an amusing scene from The Big Lebowski keeps running through my mind ... the Nihilists, who frequently proclaim in their phony German accent, "Vhe are Nihilists, vhe believe in Nossing!"...

Whereupon they go on to demonstrate a deep and profound reverence for money. Unfortunately for them, of course, the Dudester didn't have any.

The House has strangled fiscal stimulus. Austerity from now until the 2012 election.

Won't this foster further confidence in the safety of the US bond market through the 2012 election?

I think the long bond could continue to fall through the basement floor.

The trouble: When do you feel confident enough to transfer your holdings to a broker to sell them. Its a 2 week transaction now. Who can know what will happen within the next 2 weeks at this point? Our visibility is diminishing.

If the next wave of the credit crisis is upon us, what are the probable consequences for Asia / Oceania? Thoughts?

------------------

Well, I wrote about this earlier. If the dollar keeps firming, it's going to crash the carry trade. The hedgies which include desks at the TBTF will have to cash out of the higher interest bonds in countries with higher interest rates. NZ and Oz are two notable recipients of carry money. They then have to take those currencies and buy USD to pay off their lenders. This will drive the USD higher in a positive feedback loop and plummet the forex of recipient countries. To see how this will affect NZ, take a look at what happened to the Asian Tigers when the hot money instantly departed in the late 90's.

New Zealand, which is so critically dependent on China's growth in consumption, has just posted slower than expected economic growth for the three months ended June 30, according to Statistics New Zealand, falling short of a Reuters survey of economists picking a 0.5 per cent pace of growth and a 0.6 per cent rate forecast by the Reserve Bank.

The news appears at the top of the business section of New Zealand's most widely read paper, The New Zealand Herald. On the one hand, I'm surprised the Herald is publishing it, and that the statisticians are not fudgind (i.e., lying about the numbers to a greater extent). Because in such a small economy, the apple cart can be upset very easily.

But then news of this ominous statistic is then followed by this bit of pollyana-ism from major bank Westpac Bank's chief economist Dominick Stephens: "...at this stage we are more likely to consider this weak read as a pothole rather than a renewed broad-based economic slowdown."

No where does the article even hint at the prospect that we're heading into a recession. This despite clear indications that an recession in the U.S. and/or Europe is possibly (certainly?) imminent. And this despite increased warning from the likes of Jim Chanos that China's growth may effectively be ZERO once massive unpayable debts within the Chinese economy are considered.

Given the silence on these counts, the caveat Stephens offers might be called suspicious. More likely, however, it's an outright lie. They know this is not a pothole. But it's a major bank up to its eyeballs in New Zealand mortgages (ordinay "poor" people own multiple houses here, all leveraged to the hilt--seriously, I know a student who owns three houses!!!).

And yet there is something eerily reassuring about reading the words, "it's just a pothole." Lying does have some bizarre effect, a la The Secret. Like saying it makes it so. Like the words become reality. So why not? I know the reality and even then the words allow little doubts to creep into my mind, like "maybe it's not so bad" and "maybe I'm listening to too many crackpots on Automatic Earth."

But ultimately, I know that the New Zealand Herald depends on real estate advertising more than anything else (just weight the kilo-heavy real estate supplements that come with nearly every issue). Just like Westpac depends on real estate staying afloat. So you simply cannot trust them. They MUST lie to survive. You can't blame them. Just blame yourself if you believe a word out of their mouths!

My question is when they start lying about the fundamental statistics themselves. As in, they just don't release the numbers that say we're in a recession. To save their arses, I expect they'll resort to such tricks. If they haven't already!

It may be just a pothole. In New York City back in the mid 70's, sometimes you would find potholes with cars at the bottom and cadavers in the cars. Just a pothole. Made interesting reading in the morning papers.

And not a single post by TD about PMs crashing... figures. No margin hikes = nothing to blame it on but good old-fashioned, risk-off debt deflation.

Now, all of the US policymakers are looking for Europe to "do something". And the European policymakers are looking for the BRICs to "do something", and they're all looking back at the US to "do something". But what can they do? Not a thing, and they know it.

If you are following the math, as presented at market ticker, then YOU must have taken your profits off the table so that you can buy, buy at the bottom.

Quote Karl,"... Now recognition of that fact is dawning on people in a convulsive fashion, ..."

A lot of commentators have gotten the picture and unlike Karl, do not have the patience to find new ways of repeating the explanation with a lot of words.

The picture has been skewed by easy credit for too long. Too many people still believe that they are middle class.Too many people still believe that they are in the well-to-do 10%.Taking away credit and living within your source of income will be the revealing moment. We will see how many are wearing bathing suits.We will see if there will really be a 10% in the well- to-do category or only 5%.People do not want to accept that the truth might be ...

There was one scene, however, in "Burn After Reading" that is seared into my skull: the very last scene in the CIA Office. The scene epitomizes where we find ourselves at this point in time! Here's a portion of it:

PALMER There is the woman. The gym woman. Linda Litzke.

GARDNER CHUBB Oh yeah. Fuck. Where is she.

PALMER We picked her up. We have her.

GARDNER CHUBB Can we, uh----

PALMER She, she, she says she'll play ball if we pay for some... I know this sounds odd----some surgeries she wants. Cosmetic surgery. She says she'll sit on everything.

GARDNER CHUBB How much.

PALMER There were several procedures. All together they run to, um----

GARDNER CHUBB Pay it.

PALMER Yes sir. Should I pay it out of, should it be from----

GARDNER CHUBB One of the black accounts, I don't give a shit. The January fund. Whatever.

PALMER Okay.

GARDNER CHUBB Jesus. Jesus fucking Christ.

He shakes his head.

GARDNER CHUBB (CONT'D)... What did we learn, Palmer.

PALMERI don't know, sir.

GARDNER CHUBBI don't fucking know either. I guess we learned not to do it again.

Yeah, the Coen Bros are great. First intro was Raising Arizona. Almost died laughing. Loved the Hell's Angel and Holly Hunter was fabulous. And then No Country for Old Men almost killed me with fright. Talk about depiction of a serious psychopath. Anton Chigurh ranks with Hannibal Lecter as a classic psychopath.

JMG: "The main current of our industrial culture which has made the rational mind central to its core cultural project and fixates on a particular mode of conscious control—more on that in a later post—has few resources to offer for dealing with that substructure, other than ignoring it, white-knuckling it, or drugging it into temporary submission. There are better tools to hand, though: the tools of magic.

Consider a healing spell, the sort of thing that shamans, sorcerers, and mages have practiced down through the centuries. Do these work? Quite often, yes, and the mechanism in many cases seems to be what today’s science calls the placebo effect. Today’s science treats the placebo effect as an obstacle to be gotten out of the way, and it’s right to do so. If you’re trying to find out the properties of matter and energy on their own terms, the placebo effect and its kin are major sources of confusion. You need to keep mental phenomena from bollixing up your perception of physical phenomena, or the results aren’t good. What’s an obstacle to the scientist, though, is the mage’s bread and butter.

The operative mage doesn’t want to get rid of the placebo effect. Quite the contrary, he or she wants to amplify it and use it, to direct the body’s healing resources toward a cure. That’s what the psychologically charged symbols, the ritual psychodrama, the emotionally evocative herbs and incenses, and all the other tools of operative magic are there to accomplish."

He's not even a q- tip.He will be one of the future prophets connecting with the youth.---@ boardWatch for this debate on BBC. The tape is not up yet.http://www.bbc.co.uk/news/

22 September 2011 Last updated at 11:35 ET HelpInternational Monetary Fund (IMF) managing director Christine Lagarde is taking part in a BBC debate on the global economy, amid warnings that it is entering a "dangerous new phase".

Other contributors to the discussion include former White House economic adviser Austan Goolsbee and Mohamed El-Erian, chief executive of the Pacific Investment Management Company.

Recommend highly that you watch today's Mad Max with Reggie Middleton as the second half interviewee.

http://www.youtube.com/watch?feature=player_embedded&v=ciGKW3oRJmI

Reggie is a merciless self promoter, but he is incredibly smart, meticulous, well informed, and articulate. He deals today with the status of the French banks and BNP Parabas in particular. The first half of the show, the standard banter between Stacy and Max is also worth the 15 minute view.

Eric in Cali said...WooHoo! The Long Bond at 2.8%

I'm up 20%

Who could have thunk it? Who predicted it. Nobody that I know.

----------------

You don't know Stoneleigh? Since your blogger profile began this month, I guess that is possible.

OK. I'll give you my 2 cents. First watch the Reggie interview linked above. Reggie has it right that the only way currencies can save themselves is by cannibalizing the other guys. He listed the USD, the Euro, and China. He did not mention Japan which is interesting as it also is deflating rapidly. When one of these collapses, then the others will benefit in an extend and pretend manner for a while. I think the odds are very high that the other three will collapse before the dollar. When they collapse, that currency will have what Karl likes to refer to as a bond dislocation, and the yields will have to shoot up. If it happened to the US, then all your profits would go down the WC real fast and then some. But the chances of the US being first are very small.

So where would you plan to put your Benny Bux when you cash out your 30 years? A minor point :-)

Greenpa said:basically - "all the models could be crap, you know" - which is quite true.

Indeed. And I'm pretty sure there are tons of other observations that do not conform with the theories in physics and many other sciences, but they just get ignored - Trust us, we're the PhDs, we got it under control.

I'm very curious to read accounts of periods immediately preceding and during bank runs, either historically, or in modern times, perhaps in developing countries. If any knows of any, please post links. Helps to be informed...

TD finally puts up his first post about gold since today's risk asset slaughter began, and it's complete BS from Mike Krieger. His underlying points about relative currency devaluations is valid, but the conclusion doesn't flow at all.

See, once again things aren’t as simple as they may seem. Gold is not falling, emerging market currencies have just been devalued. This is what might be expected within the current macro environment of general fiat currency death as the globe enters a recession within a depression. Things are going to be very, very choppy and I would be extremely cautious in all markets but physical precious metals should absolutely be accumulated on weakness. The system has already blown up and while that makes thing extra volatile and confusing, as JP Morgan said in 1912 “gold is money, everything else is credit.” It shall be seen to be true again.

Peace and wisdom,Mike

Physical PMs should be accumulated by who? People holding dollars? Everyone in the world, regardless of where they live or other personal circumstances? This is what you get in a system that makes materialism and marketing supreme. Almost everyone is selling something, always. Doesn't matter how smart or informed they are, or how much the evidence stacks up against their underlying thesis. They have to keep selling, or they have nothing left to say.

The World Bank ... The IMF ... are both trying to get a fund set up to re-capitalize banks.

Meaning, they want to create a fund to leverage to the moon and it then would be the final bag holder for all the bad loans that they will recognize as good as gold,( hehehe), then the investors into that fund will lose their investments, which would be very little compared to their bad loans that they put into it.

The last several times Barton Biggs was on TV we laughed, we cried, we laughed much more, but most importantly we faded every word out of his confused mouth with as much leverage as the CME would allow us (at last check margin requirements on Biggs Ultra Shorts had not been hiked in a while). After all could anyone top tick the market better than the Notorious BIGGS who on August third and fourth predicted a 7-9% rally in the S&P, only to realize a month later that he may have 99 (redemption) problems but a Biggs AUM ain't one.

The Notorious BIGGS says he is still 20% net long the market now, but wishes he was -20%, or at least 0%... when old white fund managers start referencing "biblical times" and quoting "old negro spirituals", you know something BIGGS about to happen.

"Indeed. And I'm pretty sure there are tons of other observations that do not conform with the theories in physics and many other sciences, but they just get ignored - Trust us, we're the PhDs, we got it under control."

Oh yeah. A recurring topic on my own blog, multiple posts. One of my great and entirely unknown coups; I wrote a specific attack on "mathematical models" on my blog. When a NYT science column started gushing about some new "model" being trumpeted by its creator- I commented, rudely. The modeler responded in the comments, saying I obviously knew nothing whatsoever about models and should shut up; so I responded with the link to my post.

http://tinyurl.com/4twhu4

When I clicked back to the column the next day, hoping trollishly to read an enraged and gargling response from the puffed up model maker- I found that the entire NYT article had been removed. Eradicated from reality. Not just the comments, mine or anyone else's; the whole thing had been pulled.

I hadn't ever seen that happen before, nor since as far as I know. The article had been up for 2 days; multiple comments made, then poof; gone, with no explanations ever anywhere.

On the other hand- the scientific conversation about the possibly FTL neutrinos seems to be "good science", so far.

Not the media coverage, that much, they're all babbling about the end of physics, but what seems to be going on internally.

Far as I can tell; the scientists who "made the discovery" of the law-breaking particles are NOT claiming "this is true!" - rather, they're doing what a good scientist is supposed to do- publishing their data, and saying - "wow, guys, this looks REALLY crazy, but we can't find where we screwed up. Everybody check this- and figure out where we screwed up."

If no other workers can find a mistake in the procedures or calculations- then everybody has to START to think it might maybe be true- and look for other ways to test it.

yup, it's looking grim. Simultaneously, though; I'd bet good silver that 100 years from now, there will STILL be thousands of Tea Party members working hard to elect Ron Paul President of the United States.

The inertia, and current momentum, of our culture is vast, vast, vast. Most of us are just going to ride it; all the way down.

Yeah, you just can't help but think something like this (FTL results) is an ominous sign right now. The pixie dust of modern physics and economics are both losing their [placebo] effects at the same time. It's not like the former has gone to complete waste or has been completely overturned, although the latter arguably has, but there's just a huge level of uncertainty involved. This uncertainty will either go unresolved for quite some time or it will be "resolved" by much less than 1% of the population in an era of uber-oppression. Like I said, ominous. BUT, before taking on the ire of SA ;-), I think it is hopeful as well from a larger perspective.

Here's a comment I wrote yesterday to a friend. If the FTL neutrino experiments hold up, it could be one lead toward an explanation. I would welcome criticism - but remember, I am just a Caribbean plumber, not a physicist, so comment with lubrication.

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Yeah, if it holds up it is huge. I was just saying that if neutrinos are massless, it would be a little less huge :-) That photons are massless and travel at the speed of light in a vacuum (by definition) may not mean that another massless particle must. The whole thing involves how to interpret the Lorentz-Fitzgerald equation for mass, time, and length. At the speed of light,the mass of a particle would become infinite, time would stop for the particle itself, and its length would be reduced to zero. It's kind of hard for the layman to figure what the latter two would mean on a "practical" level, but infinite mass is clearly a no-no. Einstein's theory doesn't so much state that something other than photons cannot go faster than the speed of light. It really states that it cannot go at the speed of light. But modern physics assumes that velocity is a continuous function, so the two are essentially the same.

However, it just occurred to be that this is not correct due to Heisenberg indeterminacy. In theory, the sun should not undergo fusion because the repulsive electrostatic forces between the nuclei, protons for hydrogen, do not allow the protons to get close enough for the strong forces to take over and fuse at any temperature to be found in the sun. The reason that the sun shines, is that the Heisenberg principle allows the protons to "pop" into physical reality close enough together to fuse without passing through the prohibitive, distance barrier (for which we all may be grateful). This is called tunneling. Since the Heisenberg principle may be expressed in many dimensions as long as both sides of the equation are dimensioned in erg-sec, then it would be theoretically possible for a particle, particularly one of negligible mass, to tunnel to the other side of the Einstein velocity barrier.

At speeds faster than light, the L-F equation becomes an imaginary number which would have to be practically interpreted. Some argue that particles traveling faster than light would be traveling backwards in time.

The current overwhelming consensus is that all flavors of neutrinos have mass, though the upper limit to the mass has been consistently downgraded. The latest experiment from last year puts the upper limit at 0.28 ev. However, from the standpoint of the finding, it is not critical, since any mass at all would be infinite at the speed of light. But the lower the mass, the easier the possibility for tunneling, which is why you don't find dancing girls in your fridge when you open it in the morning.

I have to say, the ZH/TD attempts to support their gold investment thesis are just getting pathetic now. The latest report from Capital Economics doesn't even need to be refuted, because it carries almost ZERO substance.

To save people the trouble of reading this nonsense, most of the argument boils down to "gold will go up again when the EMU falls apart because gold is a safe haven and people don't trust the dollar". No supporting evidence for the argument whatsoever. There are also inane statements such as this one:

"Above all, its value does not depend on the creditworthiness of any government or financial institution, and that may yet prove very significant in the weeks and months ahead."

Has this guy heard of the paper gold market?? You know, the one that trades on leverage, is at least 10x the size of physical and sets the spot price for gold?

So what are the other indexes doing at the moment- you know; the ones vaguely connected to reality?

The only one I have easy access to is copper; which is down over 20% in the last week; what about the Baltic Shipping numbers; and the number for stock sales by corporate execs? I always have trouble finding those.

As you know, I am a Campbellista as well. But until such time as the scientific community becomes totally unhinged :-) I find it interesting as to how they attempt to fuse this type of experimental data into the standard model.

Measurement of the neutrino velocity with the OPERA detector in the CNGS beamOPERA(Submitted on 22 Sep 2011)ConclusionDespite the large significance of the measurement reported here and the stability of the analysis, the potentially great impact of the result motivates the continuation of our studies in order to investigate possible still unknown systematic effects that could explain the observed anomaly. We deliberately do not attempt any theoretical or phenomenological interpretation of the results.

Note the considered uncertaintiesp. 20 Table 2: Contribution to the overall systematic uncertainty on the measurement of δt.

If you are interested, you can read the following blog where “out of the box” comments are also presented.http://blog.vixra.org/2011/09/19/can-neutrinos-be-superluminal/#comment-10621

Here is mine.What would an astronomer say?Did we find a way to measure the speed of the earth vs CMB?http://en.wikipedia.org/wiki/Sun Since our galaxy is moving with respect to the cosmic microwave background radiation (CMB) in the direction of the constellation Hydra with a speed of 550 km/s, the Sun's resultant velocity with respect to the CMB is about 370 km/s in the direction of Crater or Leo.

I am not a physicist (and you appear to be from your blogger profile), but wouldn't the important relativistic velocity be the difference between the neutrinos themselves and the detector in Italy? Why would the velocity of the sun, relative to whatever, be important? Would only be relevant if we threw away Michelson-Morley and went back to the ether hypothesis.

And everyone knows that the findings are preliminary. We are just speculating on what it might mean if they are confirmed.

Well, big theories the underwrite society are crashing down all around us, aren't they?

When an honest theoretician is confronted with evidence that would collapse the foundation upon which he himself stands, well then, lets just say that theoretician deceives himself into being honestly dishonest.

S&P500 really struggling for a traditional "take back Friday." The last 45 minutes are going to be entertaining. Active traders don't want to be long the week-end as anything can happen in Europe, while those with unhedged shorts are going to have to cover, driving the market up. Think I'll get some popcorn and beer.

Lautturi

What are the chances of the Finnish parliament to pass a resolution to have Olli Rehn tarred and feathered the next time he comes back to the fatherland?

"Greece will significantly reduce its participation in Nato and EU military missions due to the economic crisis in the country, National Defesce Minister Panos Beglitis announced on the sidelines of an informal EU defence ministers' Council held here on Friday. He said that the ministry was preparing to cut down Greece's participation in the Nato and EU missions in Afghanistan, Kosovo and Somalia..."

And after running out of reasons to keep backing gold, TD shifts his extremely flawed ideological bias towards geopolitics:

"So instead of going ahead and doing any of the austerity stuff Greece promise to enact back in 2010, which has been sacrificially pushed forward from 2015 to 2014, pretty much like what the US will need to do soon to avoid more downgrades when the next debt ceiling hike is due in a year, it will instead pack up and leave, most likely giving Turkey the impression it can do whatever it wants in the region..."

The geopolitics of the eastern Mediterranean are complicated. The USA wants Turkey to invade Syria as a proxy as a preliminary to the the USA/Israeli attack on Iran, now that NATO has almost completed its theft of Libya's sweetest crude. OTOH Turkey is a formidable military presence in the region, and is getting increasingly pissed at Greece and Israel, essentially allies, who are trying to usurp recently discovered underwater fossil fuel deposits in the region. However, as Turkey, Greece and (de facto if not de jure) Israel are NATO allies, the situation may be too complicated for Ms. Clinton. Might be a coin flip who Turkey will go to war with.

Re: FTLUsed to be a time when one could verify the scientific experiments with relative ease. This is not the case any more. We have to take these experiments for granted, and I personally don't like that. At all. It always leads to false assumptions, and worse.There's a clique (like everywhere) who thinks they have all the answers, and, worse, they claim they understand quantum physics somehow. Nobody does.Disclaimer: IANAP (I am not a physicist), but I studied it enough to be humbled by it, when I was younger and had more neu(t)rons).

Going back to the blog post, if I understand correctly, it means that the Fed's statement this week is a lot of nothing. However, the part I am having trouble understanding is why the Canadian government (maybe others?) are suddenly full of statements suggesting that suddenly the situation has materially gotten worse. Why? Is it because the banks situation has gotten worse that it is worth talking about, whereas the average Joe's job loss isn't a big deal? I'm sure that bank failures will reverberate all over the place, but these statements coming now are confusing to me.

The blog post says that the Fed's statement is immaterial. However, the part I am having a bit of trouble with is the reaction, which seems large. The Canadian government is suddenly making all kinds of statements suggesting we are in big trouble, as if we weren't pretty close to trouble for a couple of years now. Has the situation gotten materially worse since the Fed's statement?

Being a young worker, I have no expectations to receive any CPP dollars back. Ponzi dynamics everywhere. Its a cost of making money. Can't argue about it becasue the older populations are the voting populations receiving the CPP $. Demographics.

They are conditioning sheeple for the "austerity hammer." If the economy isn't all messed up, then why should they cut back on social services, pensions, etc.? The corporate media always foreshadows the deep government's future intentions. That's a big part of its Orwellian "job."

We've been having substantial technical problems with internet access for the last few days. The situation may continue for a while, hence our access is likely to be intermittent, based on times when we can get to an internet cafe. Please bear with us as our publishing schedule is hostage to fortune at the moment.

We've found the culprit for the massive sell-off in gold and silver - margin hikes! Which begs the question, what exactly are margin hikes?? Margin is just another word for collateral posted by investors to obtain leverage on their speculative trades, i.e. borrow money from the broker/exchange. When the margin requirement is hiked, by the CME in this case, investors have to post more cash collateral against their speculative positions and therefore they get less leverage.

So if investors unwind their PM positions in anticipation of a CME margin hike, it essentially means they are not willing and/or able to back those positions with extra cash. Of course, they are also selling in anticipation of other people in the herd selling. Basically, a margin hike means the cost of speculating just went up in cash, which means the benefits of liquidating speculative positions just went up. Call it centralized manipulation if you want (how many times do you hear about non-PM margin hikes? and what isn't manipulated these days??), but liquidation in anticipation of margin hikes is the very definition of debt and asset price deflation.

That dries up a lot of paper gold speculation and put more reality into the actual holding of bullion, no? Gives short term term pain for us but a cleaner bullion market. I quess China, India and Russia are not unhappy with the price drop. Do I hear slurping slavering sounds from that quarter?

Well I have been saying like a broken record (remember them?) that the price of precious metals in terms of fiat currencies is based largely on highly leveraged speculation. This is not to say there are not other factors involved. High leverage was also available when silver was $6 an oz.

So why are the exchanges boosting margin requirements? PM bugs would say that it is a conspiracy on the part of the MOTU and the central banks to keep the price of gold down. (For those familiar with my comments, the word "conspiracy" is not a pejorative term in my lexicon. It simply denotes what the dictionary defines it to mean, and they, like demons, are legion in the world today).

Another interpretation is that credit is drying up with a deflationary collapse. The PM exchanges know that the handwriting is on the wall, they don't want to get stuck with defaults, and they would rather that their clients have time to post further margins as an option than get forced out of their positions by a computer, which breeds poor customer relations.

In any event, expect the price of PM's to drop further. It will be interesting to watch gold and silver bugs like Durden and Keiser deal with a reversal on the fortunes of their advice. They regard it emotionally as an attack against their religion. One commentator I like a lot for his good sense and humility is Charlie McGrath who has been a bit of a silver bug. His comment was that you bought your PM's as a long term store of wealth against possible inflation or HI. We are going into deflation now. Just forget about your PM stash unless you need it to buy food or electricity or pay the rent. If you do, just sell what you need to. Don't be an idiot about it.

Good reason to follow Stoneleigh's advice which is do not leave yourself short of cash to load up on PM's. Only do it if you have the extra cash beyond your basic expenses.

Many people are holding on to gold with borrowed money and I will not be surprised if this stuff falls a $1,000 an ounce in a short time.El g Turkey will not attack Syria because they have a new image and that's to look good with the Arabs.They act like it is because they are Muslims but if that was true than they would stop killing the Kurds.

Joe in NC said...The derivatives mess seems to be unpredictable because of the lack of transparency. Any thoughts on the chances of a another "cascading failure" event happening again? Potential triggering events?

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I would rate the probability at 0.999. The other .001 factors in that the earth gets smacked by an asteroid before the derivative collapse occurs which would make it both moot and mute.

There are a score of things that could trigger it. I guess highest on the list would be a TBTF failing. Leading contenders at the moment are BOA and the French giants. And a new Greek coiffure to the senior bond holder banks would probably be sufficient to trigger the mess.

The MSM morons like to say that the net on the derivatives is zero. But they do not weigh in the counter party risk, which is idiotic and the banks and hedgies writing this crap have no reserves and never expected to have to pay out on them. And the guys at the desks took their commissions and have their Lear jets gased for that tropical island.